Warren Buffett and electric vehicles (EVs) aren't typically discussed in the same sentence, but if you look at Berkshire Hathaway's (BRK.A -0.10%) (BRK.B -0.09%) portfolio, it's evident he's interested. The 10th-largest position in Berkshire's portfolio is BYD (BYDDY -0.78%), a Chinese automaker focused on EVs.
So should you follow Buffett's lead and purchase this stock? Or is this one that's best left to the experts? Let's find out.
BYD is aiming for battery-only EV leadership
Investing in Chinese companies comes with many challenges. First, they aren't subject to the same regulatory framework as U.S. companies. Some accounting and auditing rules aren't always consistent with what U.S. shareholders come to expect from their investments. Plus, it's harder for U.S. investors to verify that BYD vehicles are exploding in popularity without boots-on-the-ground research of their own.
Second, the Chinese government has, at times, heavily influenced how publicly-traded companies do business, even when it isn't in the best interest for shareholders. While we have not yet seen an example of such at BYD, it isn't something we can completely rule out.
Still, this hasn't discouraged Berkshire Hathaway from investing $3.5 billion in BYD, so what's the big deal?
If you count all plug-in vehicles as EVs (battery-only vehicles and plug-in hybrids), BYD sold the most EVs globally, with 1.86 million vehicles sold in 2022. That edges out Tesla (TSLA -2.44%), which sold 1.31 million. However, if you narrow your focus to battery-only EVs, BYD falls to second place with 913,000 sold (because Tesla doesn't sell any hybrids).
But BYD doesn't plan on staying in second place for long. The chairman of BYD reportedly set the company's 2023 sales goal for 4 million EVs. That would blow Tesla out of the water and cement BYD's EV leadership.
It also demonstrates that BYD can go toe-to-toe with Tesla and win. But can it compete with Tesla's financials?
BYD's stock is expensive, but without Tesla's advantages
One of the reasons Tesla catches a lot of flak is its premium valuation (Tesla currently trades at 52 times earnings). But BYD isn't much better, as it trades at 54 times earnings. However, what separates Tesla from BYD are its margins.
BYDDF Profit Margin data by YCharts
Tesla's profit margins are essentially equal to BYD's gross margin, which means Tesla's bottom-line profit is the same as what BYD pays for its vehicle components and production without adding overhead expenses. Tesla holds this advantage over nearly every legacy automaker, and BYD is no different.
One area BYD's edge is starting to show is its revenue growth, which has exploded since BYD announced it was only producing EVs back in 2021.
BYDDF Revenue (Quarterly YoY Growth) data by YCharts
If BYD can keep its impressive growth rate up, it will rapidly bring down its valuation through sheer expansion.
China's EV market is massive, and BYD is doing a great job of competing with Tesla to capture it. However, with poor margins, the stock doesn't seem primed to be a true Tesla competitor in the stock department. If you strip out all earnings and look at how BYD is valued compared to legacy automakers, it's clear it trades at a premium despite not having margin advantages.
BYDDF PS Ratio data by YCharts
Is BYD an exciting company that investors should keep an eye on? Absolutely. However, I think investors should be wary of investing in the stock because of the difficulties associated with investing in China; plus, it doesn't hold that much of a financial advantage to legacy automakers like Ford Motor Company or General Motors.
Still, with its impressive growth rate, investors wouldn't be wrong to establish a position in BYD, as long as it's kept to a reasonable size.
The EV market in China is massive, and BYD is emerging as the leader. Warren Buffett seems to think this company is worthwhile, so maybe it's worth a further look.
