- Li Auto’s automobile sales are on firm ground, having increased substantially in the latest quarter.
- But while sales revenue is growing, the company’s losing more money than anticipated.
- Despite missing estimates in the past two quarters, the share price is solid.
Li Auto Inc. (NASDAQ: LI) will release the earnings report for Q3 2021 on 12 November 2021. On the surface, this is a routine exercise, similar to hundreds of other companies whose financials for the latest quarter will be out this month.
In the past two quarters (Q1 and Q2 2021), the company delivered solid numbers – 12,579 vehicles in Q1 and 17,575 in the second quarter. The increased sales numbers saw Li Auto’s gross profit in Q1 hit 16.9% quarter-on-quarter and 18.7% in Q2.
But curiously, the company failed to meet consensus per-share earnings in both quarters – it reported -$0.06 EPS in Q1 against -$0.02 estimate, and -$0.02 in Q2 against -$0.01 estimate.
Logically, a company should lose less money than anticipated when sales beat estimates. But Li Auto’s loss has nothing to do with foul play because the company’s research and administrative budgets have increased substantially. Moreover, the company is in a hurry to protect its market share from domestic rivals like Nio and, internationally, from Tesla and Lucid.
Li Auto tempered Wall Street expectations in the latest Q3 delivery outlook, having delivered 7,094 vehicles in September, more than 1,500 less than the 9,433 delivery the previous month. While the September deliveries were a 103% gain year over year, the numbers suggested an issue with the company’s production.
In September, the company confirmed shortages of essential chips on the back of the coronavirus pandemic. Li Auto, in the same statement, said that it was revising the expected vehicle deliveries for Q3 2021 from between 25,000 and 26,000 units to 24,500.
The delivery outlook revision is a significant development, mainly because Wall Street’s confidence in the LI stock stems from the company’s positive sales performance. Therefore, if Li Auto’s revenue falters, there is an undeniable chance that the stock will suffer.
On a positive note, Li Auto’s rivals are also facing similar headwinds. For context, Nio Inc.’s (NYSE: NIO) deliveries tanked 65% month-over-month in October, citing supply chain disruptions and restructuring of manufacturing.
Wall Street is also on edge concerning China stocks because of Beijing’s tech sector crackdown. Although the regulators did not target EV makers, the headlines weighed heavily on the LI shares.
Share price movement
Although authorities started the campaign to regulate Big Tech in 2020, the crackdown caught momentum in 2021, and a massive sell-off of China stocks followed. This, coupled with supply chain disruptions and other pandemic-led issues, saw LI shares sink in mid-May 2021.
But positive sales data kept the stock afloat, even gaining 106% to top $34 (mid-June) in the space of one month. As you may recall, we touched earlier on the fact that LI stock kept rising even when the earnings missed analyst estimates. Another factor that might have buoyed the stock is a broad rebound in China stocks after fears of a crackdown mellowed in October.
The LI stock also appears to have suffered immensely on the news that the company expected Q3 deliveries to fall below 25,000. But the stock quickly recovered and established a solid trajectory above the 50-day moving average.
Bottom line
Li Auto beat estimates in Q4 2020, but the stock declined 11.54% the next day. In a sense, this tells investors not to celebrate earnings beat too much, if it happens, in the upcoming release. Instead, one should look to deliveries. The stock is likely to gain substantially if the deliveries figures come in strong.
