Rocketing to a price of $27.7 during today's afternoon trading session, shares of Li Auto are still -17.38% below their average target price of $33.53. Could there be more upside potential for the stock? Analysts are giving LI an average rating of buy and target prices ranging from $26.031864 to $39.505554 dollars per share.
The market seems to share this optimistic view, since Li Auto has a short interest of only 4.2% (this is the percentage of the share float that is being shorted). Each short position represents an investor's expectation that the price of the stock will decrease in the future.
When a stock is sold short, it means an investor has borrowed shares of the stock from their broker, and then sold them at the going market price. The investor hopes for the price to decline, so that they might buy those shares back at a lower price in the future. Once they do, they can return the borrowed shares to their broker, and keep the profit they made on the transaction.
One measure of the market sentiment regarding a stock is its rate of institutional ownership, which in the case of Li Auto stands at 7.8%. This indicates a lower than average rate of institutional ownership -- but what does that have to do with sentiment regarding the stock?
The reason we look at institutional ownership is that institutions such as hedge funds, pension funds, and mutual funds have vast research capabilities. They are often close to management, speaking to them one-on-one and gaining an understanding of the opportunities and challenges they face. Thus, if an institution is willing to place their capital in a company, it's likely that their due diligence has shown it is a safe bet.
Overall, there is mixed market sentiment on Li Auto because its an analyst consensus of some upside potential, a buy rating, an average amount of shares sold short, and a very small number of institutional investors. Warren Buffett famously said that in the short term, markets are voting mechanisms, but in the long term, they are weighing mechanisms. This means that long term investors should be aware of a stock's fundamentals before committing.
Buffett was one of the fist investors to focus on free cash flow as a yardstick for a company's health. Here are LI's recent cash flows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 7,140,033 | 916,520 | 6,223,513 | 1805.76 |
| 2022 | 1,070,038 | 743,475 | 326,563 | -57.49 |
| 2021 | 1,308,788 | 540,529 | 768,259 | 103.39 |
| 2020 | 481,196 | 103,477 | 377,719 |
