Things aren't looking great for Li Auto Inc. (LI) right now. The Chinese electric vehicle maker, often positioned as a Tesla Inc. (TSLA) competitor, is heading into its third-quarter earnings call with a cloud of bearish sentiment hanging overhead. And when we say bearish, we mean really bearish.

The Numbers Tell a Tough Story

Analysts are predicting that Li Auto will report its biggest-ever revenue decline when it releases Q3 results. According to Bloomberg, expectations point to a 38% year-on-year revenue drop for the automaker. That would make this the steepest decline since the company listed on the New York Stock Exchange back in 2020. Not exactly the milestone you want to celebrate.

The vehicle delivery numbers back up this gloomy forecast. Li Auto delivered just over 93,211 vehicles in Q3, which represents a 39% year-on-year decline. So what's driving this downturn? Competition, and lots of it. The extended-range electric vehicle (EREV) sector, where Li Auto has carved out its niche, is getting increasingly crowded with serious players.

Eugene Hsiao, an analyst cited in the Bloomberg report, pointed out that rivals like Xpeng Inc. (XPEV) and Xiaomi Corp (XIACF) (XIACY) have EREV models in the pipeline. His take? Li Auto will need to "commit to a shift in product strategy" if it wants to increase its appeal among customers. In other words, standing still isn't an option anymore.

Recent Track Record Isn't Helping

It's not like the company was crushing it before this either. In Q2, Li Auto reported revenue of $4.2 billion, representing a 4.5% year-over-year decline and missing the analyst consensus of $4.4 billion. The company also posted adjusted EPS of 19 cents, falling short of the 24-cent consensus estimate. Missing on both the top and bottom lines doesn't exactly inspire confidence going into the next quarter.

Operational Headaches Pile Up

Beyond the financial numbers, Li Auto has been dealing with some operational challenges that would give any executive heartburn. The company recently laid off multiple employees after its Mega MPV was recalled due to battery fire risk. This wasn't some theoretical concern, either. Reports emerged of a vehicle catching fire after sparks shot out from its chassis. Li Auto ended up recalling over 11,411 units of the vehicle, citing coolant leakage issues.

On a more positive note, the automaker recently inked a deal with LiDAR maker Hesai Technology (HSAI). Under this agreement, Hesai will become the company's sole supplier of LiDAR technology, providing the tech for all of Li Auto's upcoming models. It's a strategic move that simplifies the supply chain, though whether it helps turn around the broader business challenges remains to be seen.

What the Market Says

Despite all this negativity, LI shares actually climbed 1.10% to $18.32 at market close on Tuesday. However, the stock slipped 0.17% to $18.29 during after-hours trading, according to market data. The company scores well on value metrics and offers satisfactory growth characteristics, though momentum indicators remain poor—which seems appropriate given the current situation.

As Li Auto prepares to report earnings, the question isn't whether the numbers will be bad. Analysts have already set that expectation. The real question is whether management can articulate a compelling path forward in an increasingly competitive market where everyone and their grandmother seems to be launching an EREV model.