My previous bullish thesis about Li Auto (NASDAQ:LI) did not age well as the stock lost 16% of its value since April. The S&P500 rallied by 10% over the same period. I remain optimistic despite the share price dip because LI's fundamentals keep improving and the valuation became even more attractive after the pullback.

I reiterate my "Strong Buy" rating for LI because the company continues growing faster than the Chinese EV industry, which helps to command a notable 13.5% market share despite the company's very young age. Its new L6 model is very successful and will likely help to sustain impressive revenue growth further. LI's fortress balance sheet opens wide opportunities to innovate and invest in growth. When I see how fundamentals and the share price are moving in opposite directions, I can conclude that the recent pullback is not justified.

Recent developments

Li Auto released its latest quarterly earnings on May 20, falling short of consensus estimates. A $3.6 billion revenue grew by 36% YoY, a solid growth because it was significantly ahead of a 14.8% growth of the Chinese EV market in Q1 2024. When a company grows faster than the industry it means that this company gains market share.

LI's profitability metrics were improving notably in Q1-Q3 of 2023. However, the last two quarters demonstrated some stagnation, but I do not worry about it much. The gross margin remains stable and even demonstrated a slight improvement on a YoY basis. The operating margin went negative to around -3% in Q1 2024. However, this was due to ramping up R&D spending as the company works on developing new models and modernizing existing ones. Li also boosted SG&A spending in Q1, which can also be beneficial over the long term as it will help to increase brand awareness among potential customers.

In one of its May 2024 releases, Li Auto shared information that it commands a 13.5% market share in the RMB200,000 (around $27,500) and higher NEV market. LI's market position looks very impressive considering that the company is young and was established less than 10 years ago.

LI has solid potential to expand its market share further, especially from its financial position perspective. The company's cash position as of March 31 was massive, at $13.7 billion. Debt levels are low compared to cash, making LI very flexible to ramp up and develop new models.

The upcoming earnings release is scheduled for August 19. Wall Street analysts expect Q2 revenue to be $4.44 billion, which will be around 12% higher on a YoY basis. It is a substantial deceleration compared to prior quarters. However, it is important to mention that Li Auto's revenue has tripled over just a couple of years, and it is natural that the company currently confronts the law of big numbers.

Surpassing revenue consensus estimates in Q2 looks realistic for LI when I look at Q2 deliveries figures. According to the release, LI delivered 108,581 units in Q2, which was higher 25.5% on a YoY basis. A solid bullish factor from the Q2 deliveries report is that Li's new L6 model is gaining popularity with more than 20,000 units sold. This success suggests that LI is quite successful in researching and understanding the market's needs and closes this gap with its new model. To add context, a company that was very close competitor to Li just a couple of years ago, XPeng (XPEV) delivered around 11 thousand vehicles in June.

Valuation update

LI lost 43% of its value over the last twelve months. The YTD performance is not very far with a 45% share price dip. The iShares MSCI China ETF (MCHI) feels much better compared to LI with a 6% increase YTD. Li Auto's valuation ratios look extremely attractive. Forward price-to-sales ratios are just slightly above one, and the TTM non-GAAP P/E ratio is only 13.3.

Looking at ratios is not enough for a well-rounded valuation analysis. Therefore, I proceed with the discounted cash flow [DCF] simulation. Due to high country risks I use an elevated 15% WACC for Li Auto's future FCFs. Consensus estimates project a 14% revenue CAGR for the next decade, which looks conservative considering that the industry is growing rapidly and Li Auto has been quite successful in absorbing these tailwinds. A flat 6% FCF margin is approximately Tesla's last five years' level. As a leading EV manufacturer, I think that Tesla's profitability metrics can serve as a reliable benchmark.

Li Auto's fair value is almost $39 billion. This is 77% higher than the current market capitalization, meaning that LI is massively undervalued. However, my previous analysis about LI also indicated vast undervaluation. Nevertheless, the stock did not fly over the last three months.

Risks update

My history of coverage for LI looks poor. None of my three previous theses aged well. The company looks fundamentally strong, and fundamentals are actually improving. Nevertheless, the stock price moves in the opposite direction.

The geopolitical factor is probably the one that weighs on the stock price. Relationships between China and the U.S. are complicated, and some people even call it the "Cold War II". This factor was not directly affecting the EV industry for quite long, but in May 2024 the U.S. President Joe Biden increased tariffs on Chinese EVs to 100%. This measure means that Chinese EVs will be unable to compete on pricing in the world's largest economy. In June, the European Union also significantly increased tariffs on Chinese EVs. This is a big headwind for Li's international expansion plans.

The competition within China is intensifying as well. Consumer electronics giant Xiaomi (OTCPK:XIACF) expanded into the EV field this year after releasing its SU7 model. One of LI's closest rivals, NIO (NIO) is gaining momentum after ramping up its Q2 deliveries by 144% YoY. Other Chinese players like BYD (OTCPK:BYDDF) and ZEEKR (ZK) also delivered strong volumes growth in June and Q2.

Bottom line

To conclude, LI is still a "Strong Buy" in my opinion. The company's fundamentals keep improving, its new L6 model is apparently a success, and its balance sheet positions well to fuel aggressive growth further. The valuation is extremely attractive as well.

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