What transpired

Shares of Chinese electrical car or truck (EV) manufacturer Li Car (NASDAQ:LI) went on a tear past calendar year, almost tripling in selling price involving July and November — but it has been all downhill considering the fact that. On Thursday, the slide continued in the wake of the firm’s fourth-quarter earnings report. Its shares closed the investing session down by 9.8{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}.

But was the Q4 report seriously as bad as all that?

Man in suit stands atop a red arrow declining stock chart

Picture source: Getty Illustrations or photos.

So what

Li Vehicle grew its car or truck income by 65{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} yr more than calendar year in Q4, moving $622 million really worth of metallic, and its total income of $635.5 million were up by a very similar 65{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}. Problem was, the organization gained slimmer gross margins on those gross sales, down 230 basis points sequentially to 17.5{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}. The enterprise reported an running decline of $12 million — but a web earnings of $16.5 million for the quarter.

Ideal of all, Li Car suggests it generated $245 million in totally free income stream.

For the year, profits totaled $1.45 billion, the company’s operating decline was $103 million, and on the base line, the organization experienced a web loss of $23 million. What I’d argue is the extra important metric, though — absolutely free funds flow — was at $378 million for the year.  

Now what

Li Auto predicts that in the to start with quarter of 2021, it will provide amongst 10,500 and 11,500 autos — near to a 300{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} improve about its Q1 2020 effectiveness. Profits growth need to be comparable — someplace between $450 million and $494 million equating to as a lot as 279{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} growth.

That appears like great information to me. The difficulty with Li Car, though, is just not its development rate, but its valuation. Even valuing the stock on totally free funds circulation (of which it has plenty) rather than internet revenue (which it lacks), with a industry capitalization of $23.2 billion, Li Car is buying and selling at a staggering 61 instances its yearly free of charge dollars flow. Granted, if the business succeeds in increasing sales, earnings, and totally free funds circulation at triple-digit-share costs for many years on end, it could rapidly increase into that valuation.

What concerns me when taking into consideration a inventory this new, although, is … what if it are not able to?

This posting signifies the viewpoint of the writer, who may disagree with the “official” advice place of a Motley Idiot high quality advisory assistance. We’re motley! Questioning an investing thesis — even a person of our own — can help us all assume critically about investing and make selections that assist us develop into smarter, happier, and richer.