Key Points
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Tesla’s premium valuation reflects opportunities extending far beyond electric vehicles.
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Robotaxis could unlock an enormous new recurring-revenue opportunity for Tesla.
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BYD offers compelling EV exposure at a much cheaper valuation.
- 10 stocks we like better than BYD Company ›
Tesla (NASDAQ: TSLA) and BYD (OTC: BYDDY) are two of the largest electric vehicle manufacturers in the world. But if you own them, you’re paying dramatically different prices for each dollar of profit these companies generate. BYD currently trades at roughly 20 times trailing earnings. Tesla trades at around 344 times earnings. That’s a massive difference, particularly when you look at what the two companies are actually selling.
In September, BYD sold 463,561 new-energy vehicles (vehicles powered by an alternative to fossil fuels), up about 17% from a year earlier. Overseas passenger vehicle and pickup sales reached nearly 180,000, representing an increase of more than 150%. Tesla, meanwhile, delivered 486,532 vehicles during the entire third quarter. That was better than Wall Street expected and was certainly a modest improvement from Q2. But deliveries were still down roughly 2% from a year earlier.
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So why does Tesla command such a higher valuation on an earnings basis? Because the market isn’t really valuing Tesla as a car company anymore. Let’s see which stock is the better deal right now.
Image source: Getty Images.
Tesla is a bet on what comes next
At 344 times earnings, Tesla’s existing automotive business can’t justify the valuation on its own. The bull case increasingly rests on autonomous driving, robotaxis, artificial intelligence, energy storage, and Optimus humanoid robots. And there’s huge potential here.
Tesla deployed 13.7 gigawatt-hours of energy storage products during the third quarter, up from 13.5 gigawatt-hours in Q2. And its robotaxi ambitions could eventually create an entirely new business model. If Tesla develops a large autonomous ride-hailing network and successfully commercializes Optimus, today’s earnings could look almost irrelevant five or 10 years from now. But if you’re buying Tesla today, you’re already paying for a lot of that success.
A 344 price-to-earnings ratio means Tesla can’t simply become a somewhat larger automaker. It needs businesses like autonomy and robotics to become enormous profit generators. That’s possible. And in my opinion, probable. But it’s still not 100% guaranteed.
BYD doesn’t need nearly as much to go right
BYD offers a very different proposition. The company makes battery-electric vehicles and plug-in hybrids, manufactures its own batteries, and has built one of the most vertically integrated automotive businesses in the world. It’s also rapidly expanding outside of China.
Its September overseas sales jumped 154% year over year to nearly 180,000 vehicles. That’s particularly encouraging because the Chinese market has become brutally competitive, with automakers cutting prices and fighting for market share.
To be sure, BYD isn’t immune to those pressures. Domestic sales have weakened, and total year-to-date sales were still down about 4% through September. But at 20 times earnings, you’re not paying for perfection. And that’s the difference.
Tesla needs autonomous vehicles, AI, robotics, and its energy business to eventually justify a valuation that’s already pricing in tremendous future growth. BYD mostly needs to keep doing what it’s already doing: selling millions of vehicles, expanding internationally, controlling costs, and taking market share.
Which stock would I buy?
I’d buy BYD. But that doesn’t mean I think Tesla is a bad company. Quite the opposite, actually. Tesla has repeatedly pushed the automotive industry forward, and if its robotaxi and robotics businesses become as large as CEO Elon Musk believes they can, Tesla could eventually grow into today’s valuation. But I don’t like paying today for profits that may not arrive for years.
At roughly 20 times earnings, BYD gives you exposure to one of the world’s largest EV manufacturers without requiring nearly as many assumptions about the future. Yes, Tesla is the more transformative company, but BYD is the stock that makes more sense at today’s prices. Because there’s a big difference between buying a great company and buying a great company at a great price. Right now, BYD gives you more of the latter.
Should you buy stock in BYD Company right now?
Before you buy stock in BYD Company, consider this:
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Jeff Siegel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company. The Motley Fool has a disclosure policy.
