It's official, BYD has overtaken Tesla as the EV king

Key Points

• BYD has just overtaken Tesla as the world's largest manufacturer of electric vehicles. Yet, the stock price needs to catch up.
• Major investors like Ray Dalio and Warren Buffett are fearless in showing optimism in Chinese stocks, where most avoid them.
• Simple earnings and valuation comparisons will show you why BYD should be catching up to Tesla once markets come to their senses.

What a time to be an investor; there are changes coming left and right to those who call the stock market home to their savings or spare cash to be invested. The intellectual challenge is enough to draw in the smartest minds out there, and the emotional endurance required is the ultimate way to come face-to-face with the best version of yourself.

Suppose you - like many other investors - are recovering from the emotional roller coaster of 2023, especially now that the FED is rolling out proposals for interest rate cuts this 2023. In that case, you've come to the right place to sit back, put your feet up, and piggy back on the hard work thousands of other analysts have already done for you.

You see, Bridgewater Associates (also known as the world's largest hedge fund) has concluded that the best place to invest their investor's money is in none other than emerging markets, particularly Chinese stocks. Ray Dalio, the fund's founder, may have predicted stocks like BYD OTCMKTS: BYDDY becoming industry darlings, but more on that later.

New guys on the block 

But not really. BYD has been around the block for a few years now, and it was made famous by Warren Buffett when he decided to invest in the stock a few years ago in the early 2000s. Today, Buffett has been caught unwinding some of the stock, but not for negative reasons, instead to rebalance his portfolio after making a killing on his position.

WHile not directly exposing himself to any individual names in the world of automotive stocks, Ray Dalio knew that exposing his capital to the broader bullish trends he expects out of China would be enough to allow him to benefit from inevitable trends such as those being experienced today in BYD.

Throughout the end of 2023, Dalio bought into the iShares China ETF NYSEARCA: MCHI, which is exposed to, well, the growth of the entire Chinese stock market, which includes stocks like Alibaba Group NYSE: BABA and none other than BYD.

While it is impossible for you to reverse engineer his thinking behind investing in China, one thing becomes clear today. Along with Buffett, maybe Dalio was secretly hoping that BYD (because of its rapid growth) would overtake its significant competitors in the electric vehicle space, particularly against giants like Tesla NASDAQ: TSLA.

While you can never know 100%, assuming that thesis was the driver behind their investment decisions, you can imagine that both these legendary investors are celebrating after recent announcements that BYD has finally overtaken Tesla as the king in the EV space, but what does that really mean?

More than meets the eye 

Despite Tesla stock giving a stellar performance in 2023, amounting to returns up to 120.6% in the past twelve months, leaving the S&P 500 behind by 97.5%, today, there are signs of a potential new favorite in the space. 

BYD stock has been affected by a broader contagion affecting all Chinese stocks, where the region had been termed 'uninvestable' by many looking to avoid anything having to do with investing in China. Still, you can't throw out the baby with the bath water.

How can that apply to stocks like BYD? During the past quarter, which ended in December of 2023, Tesla reported deliveries of as many as 484.5 thousand vehicles. BYD delivered 526.4 thousand in the same period, but is this sustainable?

Because BYD has landed a major deal with Sociedad Quimica y Minera de Chile NYSE: SQM, allowing the company to have an exclusive deal flow to Chile's - and the world's - largest lithium reserves, pricing power will accompany BYD from now on, allowing it to price their vehicles competitively in the market while keeping their margins steadily high.

Here's the deal: analysts are projecting EPS growth of 21.9% in the next twelve months for BYD, which competes closely to Tesla's projected 23.8%. However, the two stocks are trading at two increasingly separate levels.

BYD stock can be bought today for a small price of 20.0x price-to-earnings ratio, a fraction of Tesla's (perhaps overvalued) 80.1x multiple. All else the same, earnings typically drive stock prices, so how come these two are valued so differently despite promising similar growth in the future?

The answer is simple: Tesla is based in the United States. This market has been red hot as well as a safe haven for equity investors worldwide. BYD is based in China, and despite how well this business is managed and its potential higher valuations, this simple fact has kept investors from bidding up the stock. Does that sound fair to you?