With the recent sell-off of these two stocks, now’s a great time to consider parking an EV name in your portfolio.
Temperatures may be cooling these days, but one thing that remains hot is the S&P 500. Since the start of the year, it has soared 18% to the delight of investors.
But some stocks have moved in the other direction. Take Chinese electric vehicle (EV) stocks Nio (NIO -2.22%) and Li Auto (LI 1.27%), for example. Since the start of the year, these two stocks have provided investors with little to celebrate.
This certainly doesn’t mean that they should be written off, though. Let’s see why two Fool.com contributors think these stocks can stop heading in reverse and drive higher in the months to come.
Breaking production records and boosting margins
Howard Smith (Nio): Investors in Chinese EV maker Nio have been waiting a long time to see green shoots indicating the company is becoming a sustainably successful, global EV maker. Those green shoots may have just sprouted in Nio’s second-quarter report.
Nio shares have plunged about 40% thus far in 2024. But those returns were much worse just a month ago. The stock has surged as the company has reported strong monthly vehicle deliveries and a better-than-expected quarterly financial report.
The good news began with the company exceeding the 20,000 unit delivery threshold consistently for the first time. That’s helping Nio take market share and, importantly, improving margins. In the second-quarter earnings release, Nio CEO William Li stated:
In the second quarter of 2024, Nio achieved a record-breaking delivery of 57,373 premium smart electric vehicles, securing over 40% of the market share in the battery electric vehicle segment priced above RMB 300,000 [about $42,000] in China.
And the company thinks production and delivery can stay consistently strong. Management estimates third-quarter deliveries could reach 63,000 EVs, a nearly 14% year-over-year increase. And that is after Nio has just concluded three straight months with over 20,000 EVs delivered for the first time.
Data source: Nio. Chart by author.
Nio is also exceeding the expectations of analysts that follow the company. Third-quarter revenue and delivery guidance is higher for both metrics.
As mentioned, that growth is also helping the company by improving profit margin. Gross profit margin in the second quarter reached 9.7%, nearly double the first quarter, and significantly higher than the 1% reported in the prior-year period.
Nio is working to expand its charging and battery swapping station network in China, too. While the company continues to generate losses, it ended the second quarter with about $5.7 billion in cash and equivalents. Investors are starting to see light at the end of the tunnel. But Nio still remains a very aggressive investment, and any allocation should reflect that.
Li Auto is leading the pack in terms of profitability
Scott Levine (Li Auto): Although Li Auto stock was moving in the right direction to start the year, management provided an update in late March that led the market to pump the brakes on the Chinese EV stock. Downwardly revising its first-quarter 2024 delivery forecast from 100,000 vehicles to 103,000 vehicles, management stated a new Q1 2024 delivery project of 76,000 vehicles to 78,000 vehicles due to low order intake.
The subsequent sell-off in the stock, however, seems to have been an overreaction.
Exceeding its revised forecast, Li Auto ended up reporting Q1 2024 deliveries of 80,400 — lower than its original forecast but still representing year-over-year growth of 53%. And growth in vehicle deliveries extended into the second quarter, when it delivered 108,581 vehicles — a 25.5% year-over-year increase. Most recently, the company reported delivering 48,122 vehicles in August, a 37.8% year-over-year increase.
While Li Auto’s success in growing vehicle deliveries is undeniably important, what truly demands recognition is the company’s current success in generating profits. Unlike its peers, Nio and XPeng, Li Auto is considerably more profitable on a gross profit basis, and it has achieved profitability on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.
LI Gross Profit (Annual) data by YCharts.
It’s certainly still the early innings for Li Auto, so investors should expect to see continued growth — especially with the company continuing to expand its product line with vehicles like the Li L6, which the company characterizes as a five-seat premium family SUV. With Li Auto stock trading at 8.8 times forward earnings, now seems like a great time to pick up shares without having to pay a premium.
Should you buy these stocks now?
Unlike a decade ago, growth investors looking to hitch a ride with an EV stock have considerably more options such as Nio and Li Auto. While the market has soured on these two EV makers through most of 2024, it doesn’t mean that their stocks can’t provide some sweet returns moving forward. For those interested in the luxury niche of the Chinese EV market, Nio is a strong consideration. Those looking for a more conservative option will find Li Auto more compelling with its higher degree of profitability.