Ideal earnings fell short but the stock price still rose? Morgan Stanley: “All bad news is priced in” rather than a reversal, and the future key is “self-developed chips and ramping up production capacity.”
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Despite weak third-quarter earnings and lackluster guidance, Li Auto's stock price unexpectedly rebounded.
According to Chasing Wind Trading Desk, on November 26, Morgan Stanley analyst Tim Hsiao and his team released their latest research report, pointing out that this seemingly counterintuitive market reaction is essentially a "tactical rebound" after the negative impact of the MEGA model has been fully priced in.
For investors, the key at present is not to dwell on poor short-term data, but to judge whether the company can get through supply chain bottlenecks and achieve a turnaround via proprietary technology in 2026.
Tactical Rebound after Bad News is Priced In
The market's reaction to Li Auto's "poor data paired with rising stock price" has left many puzzled. Morgan Stanley stated in its report that investors need not over-interpret this short-term volatility. Rather than signaling a fundamental turnaround, it is more of an emotional release by the market after confirming that the negative factors surrounding the MEGA model have been settled.
“Investors are finding the stock price rise triggered by weak Q3 data and sparse sales guidance ‘perplexing’. We tend to attribute this to a tactical rebound after the MEGA overhang has been fully priced out.”
Supply Chain Pains and Profit Margin Pressure
Fundamentals remain under severe challenge, with the core issue being supply chain bottlenecks. The report notes that production ramp-up for the Li Auto i6 model is progressing slowly; even with the introduction of an additional supplier, the battery shortfall is hard to fill in the short term, with monthly capacity not expected to reach 20,000 units until early 2026. Furthermore, to cope with recalls, MEGA battery packs are being prioritized for existing users, further lowering fourth-quarter 2025 delivery expectations.
“Li Auto expects adjusted vehicle profit margin in Q4 to drop by 3-4 percentage points quarter-on-quarter to 15-16%, mainly due to increased promotions and an unfavorable product mix. Management is still hopeful that once capacity runs smoothly next year, i6 profit margins can rebound from less than 15% now to over 15%.”
The 2026 Bet: Proprietary Chips and L Series Upgrades
Morgan Stanley believes that Li Auto’s future hinges entirely on a "technology gamble" for 2026. The company plans to regain the dominant position in extended-range electric vehicles (EREV) with its upgraded 2026 L Series, with the core variable being the implementation of proprietary technology—especially the self-developed autonomous driving chip code-named M100.
“Wide adoption of the self-developed AD chip M100 is key to realizing their embodiment intelligence ambitions. Li Auto will also use the M100 chip as the backbone of its AI system in the new L Series and subsequent I Series.”
Additionally, Li Auto will launch a self-developed powertrain solution including 5C batteries and enhanced electric drive systems. Morgan Stanley maintains its “Overweight” rating and target price of $32, but under the dual pressures of electric vehicle profit margin compression and EREV sales headwinds, investor confidence in the 2026 L Series launch will be the key determinant of future stock price movement.
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