Insights

Better Buy Right Now: Tesla or Li Auto

Electric vehicles (EVs) have taken the global automotive industry by storm. The market is projected to eclipse $1.3 trillion by 2030, translating to a 19.8% compound annual growth rate (CAGR) from 2020. Today, there are more than 10 million electric cars on the road globally. That sounds like a lot, doesn’t it? Think again. Despite experiencing rapid mainstream adoption in recent years, EVs still only represent 1% of worldwide car stock. 

It’s no wonder why automakers around the world are racing to capture a share of the emerging market. Similarly, investors are piling into EV stocks in hopes of cashing in on the massive secular growth trend. By 2030, it’s expected that 300 million electric cars will be on the road, and that EVs will account for 60% of new vehicle sales versus 4.6% in 2020. 

Don’t want to miss out? Let’s dive into two pure-play EV stocks, Tesla (NASDAQ: TSLA) or Li Auto (NASDAQ: LI), and discuss which one may be the better investment opportunity right now.

Image source: Getty Images.

Tesla keeps trekking along

The Elon Musk-led Tesla continues to pave the way in the EV market. In its first quarter of 2022, its total revenues advanced 81% year over year to $18.8 billion, and its adjusted earnings per share (EPS) skyrocketed 246% to $3.22. In addition, gross margin and adjusted EBITDA margin increased 779 and 906 basis points, respectively, up to 29.1% and 26.8%. The company is clearly finding ways to operate more efficiently in spite of intensifying competition worldwide.

Even though the EV maker continued to deal with supply chain restraints and COVID-related factory shutdowns, the company produced and delivered vehicles at a rapid clip in Q1. Total production climbed 69% year over year to conclude at 305,407, and total vehicle deliveries soared 68% to 310,048. For the full fiscal year, analysts forecast Tesla’s total sales to reach $86.1 billion, translating to 60% growth year over year, and its adjusted EPS to soar 79% to $12.14.

Although the company’s operational performance has been exceptional, it’s hard to neglect other concerns surrounding the stock right now. In early June, CEO Elon Musk asked executives to halt all hiring worldwide, and he wants to cut 10% of Tesla’s salaried workforce, as his confidence in the global economy seems to have worsened of late. The controversial leader is also making headlines nonstop about his potential takeover of Twitter (NYSE: TWTR), which has now weighed down shares of the EV giant for several weeks. Plus, the stock is trading at a pricey 57.2 times forward earnings and 8.4 times forward sales, adding another layer of risk for investors today. All in all, Tesla’s latest 41% pullback year to date may present a nice buying opportunity for investors, but it surely doesn’t come without any downside. 

Li Auto is worth noting, too

Li Auto (NASDAQ: LI) is centrally placed in China’s world-leading EV market. In its opening quarter of 2022, the Chinese EV maker increased total sales by 168% to $9.6 billion yuan ($1.5 billion), and its gross margin expanded to 22.6% versus 17.3% in the same quarter a year ago. Adjusted earnings per share finished positive at 0.23 yuan ($0.04), representing a nice jump from its negative 0.10 yuan in Q1 2021. Total deliveries ascended 152% year over year to 31,716, as the company has really started to scale its business.

In fiscal 2022, Wall Street analysts project the company’s top line to expand 78% year over year to $7.3 billion, and its adjusted EPS to finish in the red at negative $0.05. However, next year’s estimates paint a more positive picture for the Chinese EV leader. The Street expects total sales to climb another 82% to $13.2 billion, and it believes the company’s adjusted EPS will conclude in the green at $0.25. Trading at just 3.4 times forward sales at the moment, Li Auto shares appear to be attractively priced given its jaw-dropping growth rates. And with the Chinese EV market set to grow at a CAGR of 30.1% through 2030, Li Auto is advantageously positioned to keep expanding. 

So, what’s the verdict?

I think both of these stocks could complement any long-term growth portfolio. In my opinion, Tesla is a shoo-in for success in the EV market moving forward, even provided its wide range of existing headwinds. That said, Elon Musk’s business already boasts a market capitalization of $729 billion versus Li Auto’s more modest $25 billion. This may indicate that the Chinese EV manufacturer has a longer runway for growth in the years to follow. Likewise, its 3.4 times forward price-to-sales multiple appears much fairer than Tesla’s 8.4. Even so, Tesla has plans to do a lot more innovation beyond EVs, and the bulls are confident that the company’s best days are ahead. We’ll have to watch the industry play out, but I feel comfortable chalking both of these stocks up as solid investment opportunities today. But, if I had to pick one right now, I’d go with Li Auto.

Luke Meindl has positions in Tesla. The Motley Fool has positions in and recommends Tesla and Twitter. The Motley Fool has a disclosure policy.

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