Chronicle Journal: Finance

Tesla vs. Li Auto: Which Electric Vehicle Stock Is a Better Buy?

If you're looking to buy shares in an electric vehicle stock, is it better to buy Tesla (TSLA) or Li Auto (LI) right now?

It’s been a great year for investors in the electric vehicle space. While stocks in the airline, retail, energy, and hospitality sectors have been crushed amid the pandemic, technology and EV companies such as Tesla (NASDAQ:TSLA) have soared towards record highs.

Tesla continues to be the largest player in the EV sector with a market cap of $538 billion. However, the shift towards clean energy has attracted multiple players to join the EV market, including NIO (NYSE:NIO), Nikola (NASDAQ:NKLA), and Li Auto (NASDAQ:LI).

In this article, we’ll compare Tesla with China-based Li Auto to see which is a better stock to buy today.

Tesla stock is up 560% year-to-date

Shares of Tesla have been on an absolute tear in 2020 and have risen 599% in 2020. This means it has gained a mammoth 14,700% since its IPO back in July 2010. That means that for early investors, Tesla stock would have turned a $1,000 investment into $148,000 in just over 10 years.

While past returns don’t matter much to future investors, here’s why Tesla remains a top stock to buy and hold even in the upcoming decade.

As countries are focused on reducing their carbon footprint, EVs will be the preferred mode of transportation and should replace traditional automobiles at a steady pace.

With Joe Biden winning the Presidential race, investors can expect the federal government to reintroduce tax credits for EV buyers which will push demand higher. Tesla has sold a record 319,000 vehicles in the first nine months of 2020 allowing it to maintain consistent profits in the last five quarters.

The stock will soon be part of the S&P 500 Index which will increase buying activity in the near-term. According to Wedbush analyst Daniel Ives’ bull-case scenario, Tesla's stock might touch $1,000 in the next year driven by the inflection of EV demand at the global level.

Ives has forecast EV sales to account for 10% of automobile sales in 2025, up from just 3% in 2020. You can see Tesla has multiple growth drivers which support its lofty valuation and a steep price to sales multiple of 17.4.

Li Auto shares have gained 125% since IPO

Li Auto is another company that has generated market-thumping returns. It has gained 125% since going public in July 2020. In the third quarter of 2020, the company shipped 8,660 Li ONE’s, a rise of 31.1% on a sequential basis. Comparatively, sales rose 30% sequentially to RMB 2.46 billion.

In the first 10 months of the year, it has shipped close to 22,000 vehicles and expects to deliver at least 11,000 vehicles in Q4. This growth has positively impacted Li Auto’s gross margin which expanded to 19.8% in Q3, up from 13.3% in Q2. It also generated an operating cash flow of RMB 929.8 million which is 106% higher than its prior quarter figures.

Li Auto continues to invest in growth and research which means it remains unprofitable. Analysts expect adjusted loss per share to improve from $0.14 in 2020 to a loss of $0.07 in 2021. Comparatively, Li Auto’s sales are forecast to double from $1.34 billion in 2020 to $2.62 billion in 2021.

Li Auto is part of a rapidly expanding industry as China is the world’s largest EV market. In October, sales of new energy vehicles in China rose over 100% to 160,000 shipments and might breach the million-dollar market for 2020.

Li Auto is trading at a forward price to sales multiple of 22.5 which is expensive. But growth stocks command a premium and Li Auto is well poised to disrupt a fast-growing market that’s still at a nascent stage.

The Winner

Both TSLA and Li Auto are exciting companies with bright futures ahead of them.  However, TSLA appears to be a better buy at this time, due to its dominance in the EV space and because it is trading at a lower sales multiple than Li Auto.

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TSLA shares fell $3.51 (-0.60%) in after-hours trading Tuesday. Year-to-date, TSLA has gained 598.92%, versus a 15.35% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

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