The move to electric vehicles has gone slower than its biggest proponents predicted but the sector continues to gain attention from investors. One company looking to revolutionize the way we drive (or don’t drive) is Li Auto Inc., a Chinese car manufacturer focused on the production of electric SUVs.
Founded by entrepreneur Li Xiang and backed by TikTok financiers, the company unveiled its anticipated IPO on NASDAQ last summer. But is this upstart automaker a worthy investment?
How to Buy Li Auto Inc Stock Summary:
Ready to buy Li Auto Inc.? Check out a quick overview so you know your next step.
- Select a broker. Finding a broker has never been easier, thanks to the proliferation of online discount brokerage firms. Even the oldest brick-and-mortar investment banks like J.P. Morgan and Merrill Lynch now offer some form of free online brokerage service. Deciding on the best broker depends on your vision and investing style. Weigh the pros and cons of your favorites and pick the one that best suits your needs.
- Deposit funds in your account. Once you’ve verified your ID and linked a bank account to your brokerage account, you can fund your account and begin trading. Read the rules regarding deposit clearing with your brokerage firm. Deposits usually take a few business days to clear, but many brokers will allow you to begin trading within 24 hours.
- Purchase your desired amount of LI shares. LI has shares listed on the NASDAQ exchange and brokers can locate them and fill your order. However, LI shares are American Depository Receipts (ADRs), a type of vehicle that allows foreign firms to list shares on U.S. exchanges. ADRs carry a unique set of risks that you must understand before investing, including exchange-rate risk.
How to Buy Li Auto Inc (LI) Stock
Electric vehicles will form the future in one fashion or another. Li Auto wants to bridge the gap between gas and electric-powered vehicles with its Li Xiang One sport utility vehicle. Unlike hometown rival Nio (which had a successful IPO back in 2018), Li Auto’s flagship vehicle runs on both traditional fuel and electric batteries, which could make the company popular in China, where EV charging stations remain sparse.
- Pick a brokerage.
Accessing a brokerage account has never had fewer restrictions. All you need to set up a trading account is a few forms of ID, a smartphone and enough cash to get started. But with that freedom comes a barrage of choices. You’ll need to do a little research on different brokers and find one that best fits the type of trading and investing in which you want to partake. Evaluate the perks, try a few demos and pick the broker that works for you.
- Decide how many shares you want.
How much of your capital should you dedicate to LI shares? It’s never a good idea to devote too much cash to a single stock, especially a foreign company that’s traded for less than a year. Determine how much risk you’re willing to take, but don’t devote more than 5% of your portfolio value to LI. If the stock proves a winner, you can always add to your position.
- Choose your order type.
Purchasing shares proves a little more complex than just punching in a buy or sell order. You’ll need to determine an entry point where you can buy the stock at a good price. If you rush in to buy just as volume starts to dry up and the trend fades, you could find yourself quickly in the hole on your trade.
You use market orders when you want to execute your trade right away, but limit orders allow for more precision. A limit order lets you set a price where you want your order to execute and the shares won’t go through until the price reaches that point. Don’t start your trade down 3% right off the bat because you rushed in with a market order.
- Execute your trade.
Once you’ve outlined the parameters of your trade and determined an entry point, you can execute your order. Using a limit order? The trade won’t complete until you reach your predetermined price. Once the shares hit your ideal price, your limit order turns into a market order and executes immediately.
Once your trade executes, your order gets sent to the broker’s order desk, not to the actual exchange. Some brokers allow direct market access to exchanges, while others accept payment from market-making firms in exchange for order flow. Know how your order routes to keep spreads as low as possible.
When the trade completes, your order will fill and the shares will drop into your account.
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Li Auto Inc. Stock History
Founded in 2015, the company quickly set to work developing its first electric hybrid SUV. By 2020, investors had begun staking claims into the startup and an IPO was announced for summer. LI shares began trading in July 2020 after receiving a valuation of $10 billion. Shares priced at $11.50 on the first day of trading.
The stock immediately shot over $15 but was range-bound for most of the summer and into the fall. The stock began rising in September, breaking the $20 mark for good right before Halloween. November was the best month on record for the shares, as prices soared as high as $47 by November 24, more than doubling in less than 4 weeks.
LI shares cooled off in December and once again began trading in range. As of February 15, the stock sits at $31.85, more than 20% off the highs but still more than double its IPO price.
Pros to Buying Li Auto Inc. Stock
Need some more reasons to buy Li Auto Inc.? Check these out:
- Higher margins than competitors: Of the 3 major Chinese electric vehicle manufacturers to go public recently (NIO, XPEV and LI), Li Auto has the best gross margins on its sales. For the 3rd quarter of 2020, Li Auto reported gross margins of 19.8%, well above NIO’s 12.9% and XPEV’s 4.6%.
- Societal tailwinds: As China pushes for more electric vehicles, it will begin spending to upgrade its infrastructure to accommodate. The trend clearly points toward a wider option of EVs. The Li One has the best of both worlds, thanks to its combustion engine, which allows long-distance travel when charging stations aren’t available.
Cons to Buying Li Auto Inc. Stock
Does Li give you pause for any one of these reasons?
- Contentious relationship between the U.S. and China: Chinese companies don’t exactly receive red carpet treatment from U.S. regulators right now. After the U.S. found Luckin Coffee cooking the books, the U.S. began a crackdown on foreign firms trading on American exchanges. This hostile relationship could create unintended problems for stocks like LI.
- Potential battery cell shortage: Manufacturers everywhere have scrambled to deal with a battery cell shortage, which couldn’t come at a worse time for upstart EV makers. Short-term solutions to the shortage don’t look promising and companies like Tesla, NIO and Li Auto brace for the impact.
- Li One recall: When you only have 1 vehicle model, a recall can damage your reputation. In November, Li Auto announced a voluntary recall in order to repair a joint on the front suspension of the Li One. The recall affected more than 10,000 vehicles, but it’s worth pointing out that the stock continued to ratchet higher after the announcement.
Investors Must Decide if Upside Worth the Risk in Li Auto Inc.
Li Auto Inc. is only a 5-year-old startup and has yet to turn a profit. Risk of investing in foreign ADRs on U.S. exchanges always proves different than investing in traditional stocks, but this goes double for LI, considering tensions between China and the U.S.
Electric vehicles lure many people in and Li Auto may have a winner on its hands in the Li Xiang One SUV. Upstart growth stocks like Li Auto always serve investors with some serious whiplash, but if you can endure the bounces and Li Auto continues to innovate, you could find rewards. Just keep those stop-loss orders tight.
About Sarah Horvath
Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.