Morgan Stanley: Li Auto’s "Head-Scratching" Rally Masks Margin Pain As Pivot To 2026 Becomes Critical
In a market environment where fundamental logic often takes a backseat to narrative shifts, the recent price action of Li Auto Inc. offers a prime case study. Following a third-quarter print that can be charitably described as "weaker" and guidance for the fourth quarter that was downright anemic, the stock responded with a bounce that left many observers perplexed.
In a research note published on November 26, 2025, Morgan Stanley analysts led by Tim Hsiao attempt to parse this disconnect. The report, titled "Need more time to pivot from pains to goals," maintains an Overweight rating with a price target of US$32.00, implying significant upside from current levels. However, the path there requires investors to look past a dismal end to 2025 and buy into a technology-heavy execution story for 2026.
The "Head-Scratching" Bounce
The immediate reaction to Li Auto’s financial disclosure was counterintuitive. As Morgan Stanley notes, "Investors found the positive stock reaction to the weaker 3Q print and anemic 4Q volume guidance head-scratching."
While the fundamentals scream caution, the bank suggests the market is engaging in a classic "sell the rumor, buy the news" dynamic—or more accurately, buying the relief that the worst is known. The analysts attribute the price action to "a tactical bounce after the MEGA overhang was fully discounted." With the market having already priced in the failure of the MEGA model to ignite sales charts, the lack of new bad news was apparently interpreted as good news.
Margin Compression and The MEGA Drag
Despite the stock's resilience, the operational reality for the remainder of 2025 is grim. The key concerns identified by the bank are "margin pressure on BEV (Battery Electric Vehicles) and volume pressure on EREV (Extended Range Electric Vehicles)."
Management’s guidance implies that the fourth quarter will see adjusted vehicle margins compress by 3-4 percentage points quarter-over-quarter, landing in the 15-16% range. This erosion is driven by "growing promotions and unfavorable product mix."
Adding to the margin dilution is the ongoing saga of the MEGA model. Deliveries for the high-end MPV are expected to "stay low in 4Q25." Furthermore, Li Auto is prioritizing MEGA battery packs for "2024 users affected by the recall," a logistical headache that Morgan Stanley warns "might also dilute 4Q margin."
The Pivot: Betting the House on 2026
With the current year effectively written off as a transition period, the bullish case for Li Auto hinges entirely on a massive ramp-up in 2026. The bank emphasizes that the launch of the "2026 L-series" is "critical to investor conviction."
A central piece of this recovery puzzle is the "i6" model. However, supply chain bottlenecks remain a stubborn hurdle. The report highlights that Li Auto has been "actively engaging with its secondary battery supplier since November," but admits that fixing the shortfall will take time. The company does not expect the i6 monthly capacity to hit its stride of 20,000 units until "early 2026."
There is, however, a silver lining for the optimists: management remains hopeful that once the i6 hits that 20k run-rate next year, margins for the model will recover from the current sub-15% levels to over 15%.
Embodied AI and The Chip Wars
Perhaps the most significant aspect of the Morgan Stanley report is the focus on Li Auto’s technological pivot. The automaker is attempting to rebrand its value proposition around proprietary tech, specifically the "mass adoption of in-house AD chip M100."
This silicon is central to what the analysts call "Li Auto's embodied AI ambition." The plan is to integrate the M100 chip into the new L series and the subsequent I series next year, making it the "backbone of its AI system."
Coupled with this is the debut of an "in-house powertrain solution," covering 5C batteries and enhanced electric drive systems aimed at optimizing efficiency. This shift toward vertical integration is designed to regain the "pole position in EREV" and target record volume in 2026.
Conclusion
Morgan Stanley’s analysis suggests that Li Auto is currently in a painful valley between two peaks. The "tactical bounce" observed recently is a bet that the company can execute a complex transition from supply-constrained, margin-pressured operations in 2025 to a high-volume, AI-driven powerhouse in 2026. For investors, the question remains whether the "head-scratching" optimism is a leading indicator of a turnaround, or a temporary reprieve before the execution risks of 2026 become the new reality.