Regardless of the vagaries of day-to-day market action, the goal for investors remains the same as ever: find stocks that promise profitability and positive returns in the future. Although hard to come by in the current inflationary climate, profitable stocks are still the path to successful investing.
Analyst Rachel Miu, who covers the Chinese auto market for Singaporean banking giant DBS, sees an opportunity to make a profit in the Asian electric vehicle (EV) niche. China has taken a comprehensive approach to encouraging electric car adoption, and the country has a large number of innovative car manufacturers focusing on electric cars.
Miu has singled out two EV stocks as likely candidates for a turnaround to profitability as early as next year. We used the TipRanks platform to check the details and find out what else makes them attractive investment choices. Let’s take a closer look at that.
Li Auto Inc. (LI)
Li Auto is one of the leading companies in China’s EV sector, specializing in the EREV niche or extended range electric vehicles. These vehicles use a range extender – a small motor – to keep the electrical system charged. Li has used this technology to produce a range of electric SUVs designed for the family market. The company, which was founded in 2015, started series production in 2019. As of November 30, Li has delivered a total of 236,101 vehicles and is working on a battery-powered design.
Last Dec. 1, Li announced his November delivery update — a total of 15,034 in the month, for a company record, and up 11.5% year-over-year. Li’s Li L9 model, a full-size 6-seater, was at the forefront of the company’s deliveries and was the top choice in its category nationally. Li also reported having a broad network to support his vehicles, with 276 stores in 119 cities and 317 service centers in 226 cities.
Also this month, Li reported his financial results for 3Q22. Starting with deliveries, the company reported a 5.6% year-over-year increase to 26,524 deliveries for the quarter. This supported total sales of $1.31 billion, of which $1.27 billion came from vehicle sales. The top line was up 20% y/y. Li saw a net loss of $231.3 million in Q3, along with a $71.5 million cash burn.
Despite the high net loss, the company’s management is optimistic about future profitability, saying a combination of increased production, efficient execution and cost control has the company on track “to reach our profitability tipping point.”
DBS’s Miu agrees that Li has a lot to offer and also believes the company is heading into its first profitable year. She writes, “Li Auto is the first automotive OEM to use EREV technology to break into the highly competitive EV industry with excellent sales performance despite a short company history. The company aims to launch its first battery electric vehicle (BEV) in 2023, creating its second long-term growth pillar… The company is expected to become profitable in FY23 – the first of pure EV start-ups in China.”
Looking ahead and with some numbers behind her comments, Miu rates the stock a buy and sets a price target of $29, suggesting ~43% upside potential over a year. (To view Miu’s track record, click here)
A total of 7 recent analyst reviews have been recorded for Li Auto, including 6 Buys against a single Hold for a Strong Buy consensus rating. The stock is selling for $21.36 and has an average price target of $30.04, implying a gain of ~48% over the next year. (See LI Stock Forecast)
Nio, Inc. (NIO)
Next up is Nio, one of the other leading EV companies in China. Nio has been working on battery EVs from the start and has been supplying vehicles since 2018. Currently, the company has 6 consumer models on the market, including sedan, coupe and SUV designs. In addition to manufacturing and supplying vehicles, the company also has the NioPower division, which offers Batter-as-a-Service for EV owners. BaaS applies the software world’s popular “as-a-service” model to vehicle hardware, enabling customers to choose fast, cost-effective options to swap out entire battery packs and keep their vehicles fully charged.
Last month, Nio reported solid delivery figures, of 14,178 vehicles for November and 106,671 for the first 11 months of 2022. These numbers represented a year-over-year gain of 30% and 31% respectively. Since vehicle deliveries began, Nio has delivered a total of 273,741 electric vehicles.
November’s high delivery numbers came on the heels of solid 3Q22 numbers. The company saw revenue of $1.83 billion for the quarter, up 38% year over year and 24% sequentially. Third-quarter sales were supported by quarterly vehicle deliveries totaling 31,607, up 29% year-over-year. Q3 deliveries include 22,859 SUV models and 8,748 electric sedans. Despite solid earnings, Nio is currently trading at a loss of 30 cents per diluted share.
While Nio has yet to show a net profit, the company turned profitable as early as 2Q20 – on a gross level. In the third quarter of this year, gross profit was $243.9 million. This was almost 13% lower y/y, but represented a 29% gain over 2Q22.
In her note on Nio, Miu notes that the BaaS and the “robust” design pipeline are both positive for overall revenue. In addition, the analyst says we should expect strong sales to drive profitability next year, with financials improving on revenue and margin expansion.
“While the pandemic lockdowns and commodity inflation had impacted the 2Q-3Q22 business,” Miu added, “We anticipate an improvement in vehicle gross margin in FY23F through scale expansion and mix improvement. In addition, the incentives to support the NEV (new energy vehicles) automotive industry are expected to positively impact sales. Finally, improving the supply chain and logistics of auto parts and components should facilitate the production of electric vehicles.”
To that end, Miu placed a Buy rating on NIO stock, with a $16 price target, indicating a potential for ~30% stock appreciation over the next year.
Overall, this innovative EV maker has received 12 ratings from the Wall Street analysts, with a breakdown of 8 Buys and 4 Holds giving the stock its Moderate Buy consensus rating. The shares are priced at $12.65 and have an average price target of $16.81, suggesting a 33% upside over the one-year horizon. (See NIO stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the recommended analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.