Global warming is a hot topic, and fighting it is on the minds of every government in the world. Given this, it is no surprise that the EV market is forecast to grow at a 23.1% compounded annual growth rate according to Precedence Research. The industry was valued at $170 billion in 2021 and is expected to be worth over $1.1 trillion by 2030, as per Precedence. Thus, in this article, I’m going to break down my top two favorite EV stocks that look poised to ride this trend; let’s dive in.
1. Tesla
Tesla (TSLA, Financial) is the largest electric vehicle company in the U.S. and a powerhouse in the energy business. The company is also a world leader in full self-driving technology and has a bold vision to create a fully autonomous vehicle system. Given Tesla has more “autonomous enabled” vehicles on the road than any other manufacturer, it can collect huge amounts of driving data to improve its AI model. Ultimately, this means Tesla could potentially disrupt entire industries.
Record deliveries and financials
Tesla reported strong financial results for the third quarter of 2022. Revenue was $21.5 billion, which increased by a blistering 56% year over year. Tesla announced plans to release its fourth-quarter financials on January 25th, 2023. However, the company has given investors a “teaser” by recently releasing its delivery & production numbers for the fourth quarter of 2022.
The company reported a record 405,278 deliveries, which surpassed its third-quarter results of 343,830 units.
The Tesla Model’s 3 & Y, made up the majority (95%) of total sales with 388,131 reported in Q4. Its Model S sedan and Model X SUVs contributed to the rest of Tesla’s sales with 17,147 deliveries reported.
In 2022, the Biden administration announced a $7,500 EV tax credit in the “inflation reduction” act. This acted as the “cherry on top” for Tesla and helped to boost sales, even during tough economic times.
Tesla’s iconic and quirky-looking Cybertruck is reportedly in production and the company has recently rolled out its semi-truck, which has been developed with state-of-the-art technology.
Back to the financials, Tesla reported strong earnings per share of $0.95, which beat analyst forecasts by $0.06 and increased by nearly 94% year over year.
Tesla is often the center of a debate as to whether the company is an automotive company or a technology company. I think the answer is pretty clear when we look at the financial data. Tesla makes the majority of its sales from automotive vehicles. However, it does have a higher operating margin than traditional “automotive” companies and even other EV companies. For example, the chart below shows Tesla has an operating margin of ~12%, which is greatest than the world's largest automaker Toyota which has a 9% margin. Over time, Tesla has plans to expand into new categories such as robotics, and bolster its self-driving technology. Therefore I would deem Tesla to be a future “technology company”, but a tech-enabled automotive company at this time.
Tesla has a fortress balance sheet of $21.1 billion in cash and short-term investments. The company does has $5.9 billion in total debt but this is fairly low relative to other “automotive” companies. For example, the world’s largest automaker Toyota has over $205 billion in debt which is eye-watering.
Valuation
In the past, Tesla has been considered overvalued by many investors, and even the legendary investor Michael “Big Short” Burry shorted the stock. After a tremendous bull run in 2020, Tesla’s share price has started to spiral downwards. Its stock price has declined 72% from its all-time highs in November 2021.
I believe given Tesla’s rapid sales growth, it has now grown into its current valuation. The stock trades at a price-sales ratio of 4.35, which is 45% cheaper than its five-year average.
The GF Value chart indicates a fair value of $396 per share and rates the stock as significantly undervalued.
2. BYD Co Ltd
BYD Co Ltd (BYDDY, Financial) is the largest electric vehicle maker in China and one of the largest in the world. The company counts Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A)(BRK.B) among its investors (Buffett first bought the stock in 2008, though since he bought the Hong Kong listing, it is not listed on his firm's 13F). Since 2008, the share price has risen by over 1,400%.
The company is most well-known for its compact EVs. Personally, I don't think they're the best-looking vehicles, but they do offer affordability to the masses. However, over the past few years the company has announced a series of new EV models such as the BYD Han, which rivals Tesla on both styling and performance. In fact, I personally like the BYD Han's looks much better than the Tesla Model 3. Reports also indicate it has a slightly higher range.
BYD plans to launch a new premium brand in 2023 in the off-road EV market. This looks to be a direct competitor to the Tesla Cybertruck, which is currently in production.
The founder of BYD is a chemist turned entrepreneur named Wang Chuanfu. Buffett’s right-hand man Charlie Munger (Trades, Portfolio) previously met with Wang and stated he is like a combination of “Bill Gates (Trades, Portfolio) and Thomas Edison," a true genius by any measure. Buffett often looks for “wonderful” management before investing into a business, and BYD ticks that box.
Strong financials and deliveries
BYD reported solid financial figures for the third quarter of 2022. The company reported $16.5 billion in revenue, which rose by a blistering 95% year over year.
Similar to Tesla, BYD has also recently announced its delivery numbers for the fourth quarter of 2022.
The company reported record monthly deliveries of 235,197 new energy vehicles (NEVs) in December, which rose by a staggering 150% year over year. It should be noted that approximately 52% of BYD’s sales come from plugin Hybrid vehicles and thus some may say this cannot be equated to Tesla’s pure battery EV sales. In the month of December 2022, BYD did report 111,939 pure battery electric vehicles. In the fourth quarter, the company announced 683,400 NEVs delivered, which increased by an outstanding 157% year over year.
Back to the financials, BYD reported earnings per share of $0.28 in its third quarter, which increased by a blistering 306% year over year. BYD’s profitability looks to be accelerating as the business scales, which is a great sign to see.
BYD has a solid balance sheet with $6.7 billion in cash and short-term investments. The company does have total debt of $3.7 billion, but a large portion (~$1 billion) is long term debt and thus this is manageable.
Valuation
BYD trades at a price-sales ratio of 1.59, which is 80% cheaper than its five-year average. In addition, the stock also trades cheaper than other EV stocks such as Tesla and NIO (NIO).
The GF Value chart indicates a fair value of $86 per share, making the stock significanly undervalued at the time of writing.
Final thoughts
Both Tesla and BYD are tremendous EV titans that have generated record business results recently. These companies are growing at a rapid pace and both stocks look to be undervalued in my view. However, it should be noted BYD could be riskier to U.S. investors due to the potential for geopolitical tensions, which could impact its share price in terms of volatility. On the other hand, Tesla's volatility risk mainly stems from the fact that CEO Elon Musk has grown preoccupied with his Twitter acquisition.
