Accelerated NEV Adoption And In-house AI Will Redefine Mobility

Key Takeaways

• Breakthroughs in autonomous driving tech, unique battery innovations, and vertical integration could yield industry-leading margins and outsize long-term recurring profitability.
  
• Strong execution in premium segments and nationwide infrastructure expansion may drive market share gains and transform Li Auto into a global NEV leader.
  
• Geopolitical tensions, regulatory risks, intensifying competition, heavy R&D expenses, and product line gaps threaten Li Auto's growth, profitability, and ability to adapt in a shifting market.

Catalysts

Operates in the energy vehicle market in the People’s Republic of China.

• While analyst consensus views Li Auto's proprietary autonomous driving advancements as a revenue and margin growth driver, this could be understated-Li's breakthrough VLA driver model and upcoming in-house AI chip may allow the company to leapfrog global competitors, attaining functional Level 4 autonomy ahead of schedule and unlocking substantial recurring software revenue and premium pricing, meaning both revenue and long-term net margin could be far higher than expected.
  
• Analysts broadly agree the upcoming BEV (battery electric vehicle) launches will expand Li Auto's addressable market and lift sales, yet Li's rapid multi-segment rollout, with strong early signs of market leadership in high-margin segments like luxury MPVs and premium 5-seat SUVs, indicates the company may structurally outgrow even bullish forecasts with outsized share gains and price discipline, fueling higher-than-expected top line growth and margins.
  
• Li Auto's integrated nationwide ultra-fast charging network, paired with industry-first proprietary 5C battery technology and smart ecosystem features, uniquely positions the company as the preferred NEV platform in China as consumer adoption accelerates and charging anxiety fades, likely driving a step-change increase in customer retention, cross-selling, and services revenue.
  
• The company's strategic expansion into Tier 4 and Tier 5 cities using capital-light 'Star Plan' stores, alongside a proactive international push timed with supportive global NEV incentives and rising premium demand, could rapidly transform Li Auto into a dominant domestic and a credible global challenger, accelerating operational leverage, boosting overall earnings, and creating a path to significant export-driven revenue streams.
  
• Continued vertical integration-from AI chips to battery R&D-not only enables innovation at a faster iteration cycle than industry peers but also helps insulate margins from input cost volatility and industry price wars, supporting structurally higher net margins as scale and operational efficiency quickly compound.

Li Auto Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Li Auto compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Li Auto's revenue will grow by 37.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.6% today to 7.7% in 3 years time.
• The bullish analysts expect earnings to reach CN¥28.5 billion (and earnings per share of CN¥27.95) by about September 2028, up from CN¥8.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, down from 21.5x today. This future PE is lower than the current PE for the US Auto industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.69%, as per the Simply Wall St company report.

Li Auto Future Earnings Per Share Growth

Risks

• Rising geopolitical tensions and emerging protectionist policies between China and Western countries may hinder Li Auto's ambitions for overseas expansion, limiting its future revenue growth and exposing it to greater risk if the domestic market slows.
  
• Regulatory changes such as the reduction or removal of EV subsidies in China, along with tightening rules around autonomous driving, could undermine demand for Li Auto's vehicles and increase compliance costs, putting downward pressure on revenues and margins.
  
• The financial results indicate recent declines in vehicle sales volume and average selling price, driven by heightened sales incentives and product mix shifts, which signals intensifying price competition in the domestic market and could erode future gross profits and earnings.
  
• Li Auto's continued heavy investments in R&D and fast-paced rollout of new technologies, including AI and proprietary chips, may lead to persistently high capital expenditures and negative free cash flow if vehicle sales volumes do not scale as expected, thus impacting net margins and overall profitability.
  
• The company's relatively narrow product lineup and delays or missteps in model iteration, particularly in the face of rapid technological change and evolving consumer preferences toward alternative mobility solutions, put it at risk of stagnant or declining revenues if it fails to keep pace with competitors and shifting market demands.

Valuation

• The assumed bullish price target for Li Auto is $38.94, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Li Auto's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.94, and the most bearish reporting a price target of just $18.1.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥371.6 billion, earnings will come to CN¥28.5 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of $23.98, the bullish analyst price target of $38.94 is 38.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.