When it comes to the electric vehicle (EV) industry, Tesla has long been the dominant player. However, recent data has shown that Tesla’s Chinese rival, BYD, is quickly gaining ground. In the fourth quarter of last year, BYD surpassed Tesla as the top EV maker globally, and it also outperformed Tesla in terms of production for the second consecutive year in 2023. With BYD expanding aggressively overseas after conquering the Chinese market, investors are now faced with a pivotal question – should they continue to invest in Tesla, the long-time favorite, or should they consider buying into the up-and-coming BYD? Let’s delve deeper into what the experts have to say.
In a recent report, Bernstein expressed concerns about Tesla’s profitability in 2024, stating that “2024 looks tough” for the EV giant. The investment management firm believes that Tesla will struggle to achieve its target of 20% delivery growth in 2024 and 2025, a far cry from the company’s ambitious 50% goal. Furthermore, Bernstein predicts that Tesla’s margins and earnings per share for FY2024 will fall significantly below consensus due to ongoing cost cuts. The firm also points to the impact of price cuts in September and October of last year, projecting a potential 15.7% downside to Tesla’s gross margins. Bernstein’s analysts believe that Tesla cannot sustainably drive demand without potentially becoming cash flow negative, and as a result, they gave Tesla an underperform rating with a price target of $150, implying a 36% downside.
Another leading financial institution, HSBC, shares similar concerns about Tesla’s future prospects. In a note, HSBC gave Tesla a “reduce” rating, indicating that they expect the stock’s price to drop by more than 20%. HSBC believes that while Tesla will remain price-competitive, the slower adoption of EVs will provide other EV manufacturers with more time to develop and present tougher competition to Tesla. HSBC further expresses uncertainty about the timing and commercialization of Tesla’s various ideas, such as Dojo (Tesla’s supercomputer), FSD (full self-driving capabilities), and Optimus (its humanoid robot in development). HSBC believes that the timeline for these projects will likely be longer than what the market currently reflects, thus warranting a skeptical outlook.
In contrast to the concerns raised about Tesla, Bernstein has a positive outlook on BYD. The firm highlights BYD’s advantageous cost structure, product innovation ability, and its viable export strategy. Bernstein considers BYD’s stock to be undervalued, trading at 13.5 times its 2024 price-to-earnings ratio and 10.8 times for 2025, when its earnings expansion potential is taken into account. As a result, Bernstein gives BYD an outperform rating with a price target of 334 Hong Kong dollars ($43), representing a significant upside potential of 63%.
HSBC also remains optimistic about BYD’s success in 2024. The bank points to BYD’s rising exports, which generate higher margins, as the “next leg of growth.” HSBC forecasts a volume and earnings growth of 28% and 30%, respectively, for BYD in 2024. With its strong position in a competitive market, HSBC gives BYD a buy rating and a price target of 356 Hong Kong dollars, implying a substantial upside of 73.8%.
According to FactSet, analysts covering BYD have overwhelmingly given it a buy rating, with 94% recommending the stock and an average price target indicating a potential upside of 56.2%. In contrast, analysts covering Tesla have a more mixed view, with only 42% recommending the stock and a meager 1.8% potential upside.
As the competition in the EV market intensifies, the battle between Tesla and BYD becomes increasingly significant. While Tesla has held a dominant position for years, BYD’s recent performance and aggressive expansion demonstrate its potential to challenge Tesla’s reign. The experts are divided, with concerns about Tesla’s profitability and the uncertain timeline of its ambitious projects, while BYD’s favorable cost structure, product innovation, and export strategy make it an attractive investment.
Ultimately, the decision rests with the investors. They must carefully analyze the strengths and weaknesses of both Tesla and BYD, considering factors such as profitability, growth potential, innovation, and the competitive landscape. The race for dominance in the EV market is far from over, and only time will tell which company will emerge as the true leader in this rapidly evolving industry.
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