The success of Li Auto (NASDAQ:LI) stock in 2023 illustrates the chicken-and-egg question bedeviling the electric vehicle transition.
In this case, the car is the chicken. Charging is the egg. Without reliable, plentiful charging, people are leery of buying fully electric cars. Without more electric cars, charging infrastructure can’t improve.
Li has squared this circle with plug-in hybrids that have gotten a big reception from China’s upper middle class. Consumers can recharge cars like the Li 9 at home each night but have 800 miles of range thanks to a gasoline engine that powers the battery.
The question for investors is whether Li stock will keep succeeding when the company takes the next step, delivering a fully electric car.
A Closer Look at Li Stock
Li’s first full electric is called the Mega. It was announced in August. It is due for delivery in February.
The Mega looks a little like my old Toyota (NYSE:TM) Previa. It has a long sloped front window and could seat as many as 7. The price is about $69,000.
The Mega will have a CATL Qilin battery pack, charging to 320 KwH in as little as 15 minutes, using proprietary Li charging stations that use 800 volts of power, against 480 for the Tesla (NASDAQ:TSLA) SuperCharger. The company has committed to launching 5 differen battery-powered electric vehicles by 2025.
It’s important to note that Li is not putting all its eggs in the BEV basket. A new hybrid will also be launched next year.
The Pace of Transition
An American driver may not notice it, but the move to BEVs is well underway.
Electrics took 13.6% of new vehicle registrations in the EU in July. Global sales are up 50%. In the U.S., sales for July were twice those of the previous year at 109,335.
Tesla still leads but there is a growing appetite for less-expensive BEVs. This is not, however, the market Li is in.
Despite this, analysts still tell investors to buy Li stock with both hands. Shares have risen slightly since the last time I visited the topic of Li. Analysts express hope for improving China-U.S. relations, and for Chinese government policies that will promote growth.
But there remains uncertainty on both these counts. China’s government is a black box, the moves of President Xi Jinping analyzed the way Kremlinologists looked at Soviet behavior during the Cold War.
The ease with which government policy can pump the brakes or hit the gas on the economy must be open to question.
Assuming a benign policy, Li stock is one of the top Chinese names you can own.
Now it’s all about middle class consumer stocks like BYD (OTCMKTS:BYDDF) and Pinduoduo (NASDAQ:PDD). The best performing Chinese issue right now is a retailer, Minso Group Holding (NASDAQ:MNSO), another bet on the Chinese middle class.
The Bottom Line
Li knows it must get its costs down and enter less-expensive markets. It has big plans to do so.
Meanwhile it will milk the upper end of the market for all it can. The question is how long it can do so and maintain margins that are higher than those of Tesla.
While I remain high on Li Auto, I wouldn’t expect anything like 10x gains from the stock until we get more visibility into China’s economy and policy. Right now, that’s going the other way.
I remain convinced that while Li has done some great things, Toyota remains the better play for the EV markets of the future. It’s all over the hybrid trend Li showed makes sense and has the scale Li lacks to compete one-on-one with Tesla and BYD at the low end.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.