The auto market has been experiencing significant growth worldwide due to the increasing demand for high-end passenger vehicles and electric vehicles. However, fluctuating raw material prices and the mutualization of premium cars might hinder industry growth. While Li Auto Inc. (LI) could be kept on hold, I think Tesla, Inc. (TSLA) and Nikola Corporation (NKLA) might be best avoided for reasons discussed in this article.
Increasing demand for high-end passenger vehicles, urbanization and rising infrastructure spending in the economy are driving the automotive market growth. The industrial sector is increasing, particularly in emerging nations, creating jobs in industries such as building, mining, and tourism.
The automotive industry is expected to grow at a CAGR of 6.9% until 2030.
Moreover, the latest Canalys research predicts the global EV market will grow by 27.1% in 2024, hitting 17.5 million units. The shift toward electric and driverless vehicles is expected to propel the automobile sector forward in the next few years. This trend is further fueled by favorable government regulations, automaker commitments to EVs, and increased concerns about climate change.
However, the market faces various challenges, such as fluctuating raw material prices and the need to comply with various international standards and regulations. Also, the mutualization of premium cars or vehicles which are equipped with the advanced technologies is extremely difficult at times due to which the market growth might be hampered in the coming years.
Considering these trends, let’s take a look at the fundamentals of the three Auto & Vehicle Manufacturers stocks mentioned above.
Stock to Hold:
Li Auto Inc. (LI)
Based in China, LI designs, develops, manufactures, and sells new energy vehicles in the People's Republic of China. The company provides Li ONE and Li L series smart electric vehicles. It also offers sales and after sales management, and technology development and corporate management services, as well as purchases manufacturing equipment.
On December 31, 2023, LI announced an update on the rollout plan of its high-tech flagship family MPV, Li MEGA. The Company currently expects to officially launch Li MEGA on March 1, 2024 and to commence deliveries in early March 2024.
LI’s trailing-12-month gross profit margin of 21.33% is 39.7% higher than the 35.38% industry average. Whereas, its trailing-12-month net income margin of 6.32% is 32.8% lower than the 4.76% industry average.
LI’s total revenues increased 271.2% year-over-year to RMB34.68 billion ($4.84 billion) in the fiscal third quarter that ended September 30, 2023. Non-GAAP net income came in at RMB3.47 billion ($484.30 million) as compared to a loss of RMB1.24 billion ($173.06 million). However, its total operating expenses increased 60.2% year-over-year to RMB5.31 billion ($741.11 million).
LI’s revenue is expected to increase 117.7% year-over-year to $5.53 billion for the fiscal fourth quarter ending December 2023. Its EPS is expected to increase 142.7% year-over-year to $0.33 for the same quarter. Also, it has surpassed revenue estimates in three of the trailing four quarters, which is impressive.
The stock has gained 29.3% over the past nine months but declined 32.5% over the past six months to close the last trading session at $28.
LI’s POWR Ratings reflect its neutral outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
LI has a C grade for Value and Sentiment. It is ranked #27 in the Auto & Vehicle Manufacturers industry.
Click here to see the additional POWR Ratings for LI (Growth, Quality, Stability, and Momentum).
Stocks to Sell:
Tesla, Inc. (TSLA)
TSLA designs, develops, manufactures, leases, and sells electric vehicles (EVs), and energy generation and storage systems internationally. The company operates through two segments: Automotive; and Energy Generation and Storage. It also offers non-warranty after-sales vehicles, used vehicles, retail merchandise, and vehicle insurance services.
TSLA’s trailing-12-month gross profit margin of 18.25% is 48.4% lower than the 35.38% industry average. Its trailing-12-month levered FCF margin of 2.30% is 57.4% lower than the 5.41% industry average.
During the third quarter that ended September 30, 2023, TSLA’s revenue from Automotive leasing decreased 21.2% year-over-year to $489 million. Its gross profit declined 22.4% year-over-year to $4.18 billion. The company’s adjusted EBITDA came in at $3.76 billion, a decline of 24.4% from the previous year’s period.
In addition, the company’s non-GAAP net income and EPS attributable to common stockholders came in at $2.32 billion and $0.66, down 36.6% and 37.1% from the prior year’s quarter, respectively. Its free cash flow declined 74.3% year-over-year to $848 million.
Analysts expect TSLA’s EPS to decline 20.4% year-over-year to $0.68 in the fiscal first quarter ending March 2024. Its revenue in the same quarter is expected to increase by 9.3% year-over-year to $25.49 billion.
Over the past month, the stock has lost 22.1% to close the last trading session at $181.06.
TSLA’s bleak prospects are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.
TSLA has a D grade for Growth, Value, Stability, Momentum, and Sentiment. Among the same industry, TSLA is ranked #39.
Beyond what we’ve stated above, we have also rated the stocks for Momentum. Access all TSLA ratings here.
Nikola Corporation (NKLA)
NKLA operates as a technology innovator and integrator that develops energy and transportation solutions. It operates through two business units, Truck and Energy.
NKLA’s trailing-12-month ROTC of negative 49.94% is lower than the 6.95% industry average. Its trailing-12-month ROTE of negative 159.83% is lower than the 12.39% industry average.
NKLA’s total revenues came in at negative $1.73 million as compared to $24.24 million. The company’s net loss increased 80.2% from the prior quarter to $425.76 million, while its adjusted EBITDA came in at negative $188.56 million, up 74.7% from the prior quarter. The company’s non-GAAP net loss per share increased 7.1% year-over-year to negative $0.30.
The company’s EPS is expected to gain 68.8% year-over-year to negative $0.14 for the fiscal fourth quarter ended December 2023. Its revenue for the same quarter is expected to gain 100.5% year-over-year to $13.16 million.
The stock has plummeted 72.7% over the past year, closing the last trading session at $0.68.
NKLA’s POWR Ratings reflect its weak fundamentals. NKLA has an overall rating of F, which translates to a Strong Sell.
It has a D for Value, Stability, Quality, and Sentiment. The stock is ranked last in the same industry.
Beyond the POWR Ratings stated above, we have also given NKLA grades for Growth and Momentum. Get all NKLA ratings here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
LI shares were trading at $30.19 per share on Wednesday afternoon, down $0.76 (-2.46%). Year-to-date, LI has declined -19.34%, versus a 4.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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