It's no surprise that electric vehicles (EVs) are rapidly replacing conventional internal combustion engine vehicles, with governments across the world prioritizing the reduction of emissions to control global warming. The U.S. government is aiming for EVs to account for half of all vehicle sales by 2030, while Europe is targeting 100% EV sales by 2035. China, the largest EV market in the world, is also gearing up to impose more stringent vehicle emissions regulations starting July 1 -- implying a more favorable environment for EV sales.
So there is huge growth potential for EV companies, especially well-established players such as Tesla (TSLA 4.96%) and BYD Company (BYDDY 1.91%). While Tesla has been the undisputed EV leader for several years, BYD surpassed the company in deliveries in the first half of fiscal 2022. Both companies are in a race to reduce the prices of electric cars, thereby boosting deliveries. But which of the two will make the better investment?
Let's find out.
Tesla is betting big on the success of fully self-driving technology
Despite gaining nearly 42% so far this year, shares of Tesla remain down by 31% on a year-over-year basis. Tesla's aggressive pricing strategy (six cuts in the last year) has not only affected the company's margins but also overall investor sentiment for the automotive giant. However, since Tesla is now prioritizing sales volumes over profitability in the current difficult macroeconomic environment, the company expects its deliveries to reach 2 million in 2023, up from 1.3 million in 2022.
Tesla clocked in revenue of $23.3 billion and free cash flow of $441 million in the first quarter (ending March 31, 2023). The company also reported gross margin and operating margin of 19.3% and 11.4%, respectively. With Tesla being one of the few profitable EV players in the world, CEO Elon Musk believes it is positioned to sell its cars at zero profit and still reap huge financial rewards from the sale of its autonomous driving technology.
Tesla charges an extra $15,000 for access to its fully self-driving (FSD) software package, the advanced version of its driver assistance software. However, customers can also opt for FSD services without a long-term commitment by paying a subscription fee of $199 per month. Tesla vehicles using FSD beta software reported one collision per 3.2 million miles driven, far better than the one collision per 500,000 miles driven by an average car in the U.S. If FSD becomes more mainstream, the company is set to reap huge financial rewards from the robotaxi market (estimated to grow from $1 billion in 2023 to $38.6 billion in 2030).
BYD is a Charlie Munger favorite
Warren Buffett's right-hand man, Charlie Munger, considers China-based BYD as solid competition for Tesla and "one of the best investments of his career." The third-largest battery manufacturer in the world, BYD has also become China's best-selling car brand, even ahead of Volkswagen (the leading auto brand in China for the past 15 years).
BYD's prominence in China is also seen as a major challenge to Tesla's market share. Besides the home market, the company is focusing on opportunities in international markets such as Latin America, Japan, and Europe.
According to the South China Morning Post, the company is planning to invest an additional $1.2 billion to expand the manufacturing of its lithium iron phosphate Blade batteries at a new factory in Zhengzhou. Local media has also reported BYD's plans to mass-produce cheaper sodium-ion batteries by the second quarter of 2023 and use them in EV models such as Qin EV, Dolphin, and Seagull. Already a dominant player in the affordable EV segment, BYD will continue to drive its sales momentum and overall growth with these battery innovations.
Regulatory risks play a role
Tesla is currently trading at 51 times earnings, while BYD is trading at 30 times earnings. Both companies are trading at a significant premium to the average P/E multiple of the automotive industry, which is 11.2. However, the premium is justified considering that the two companies are leading the EV revolution.
Tesla outpaces BYD in profit margins -- a key determinant for investment potential. Further, while there is much potential for BYD to grow in its home market, investments in China-based companies are fraught with regulatory risks. Investors in the U.S. may find it difficult to reconcile the differences in accounting and auditing standards and may not be comfortable with government interference in public-listed companies in China.
Hence, although BYD is an exciting company, it may make more sense for investors to opt for Tesla shares now.
