BYDDY - My Top 3 EV Stocks For 2024

2023-12-27 12:27:46 ET

Summary

• EVs make up a small minority of overall vehicle sales, but the segment continues to grow in major markets.
• BYD, Li Auto, and Rivian are my top three EV picks for the upcoming year based on growth, valuation, and execution.
• BYD is the largest EV manufacturer in the world, Li Auto has experienced drastic sales growth, and Rivian has strong execution and compelling growth.

Article Thesis

While the hype around electric vehicle manufacturers has ended, the market outlook for this segment of the overall automobile market is still very positive. There are many businesses in this space that will have a hard time surviving, but other companies do look more promising. In this report, I'll showcase my top three EV picks for 2024.

EV Market Overview

EVs still make up a minority of overall new vehicle sales, and they also make up a rather small minority of all vehicles that are on the road today. But for an EV manufacturer (and an EV investor), the number of vehicles on the road today isn't the most important metric -- instead, the focus should be on sales potential and sales growth.

The EV segment continues to grow in major markets such as China, Europe, and North America. The following chart shows the growth momentum EVs are enjoying:

We see that EVs, which include both battery electric vehicles and plug-in hybrids, made up around 13% of global automobile sales last year, and around 16% this year. This means that around five out of six vehicles being sold this year are still combustion-powered. But the ratio of EV sales continues to climb, as it has for years, and forecasts see this ratio climbing further in 2024 and beyond. During 2024, around one-fifth of new vehicle sales could be electricity-powered, which would be an important milestone. By the end of the decade, EV sales could get close to a 50% market share, although there are uncertainties, of course, when making forecasts that are this far out. Politics could play a huge role, e.g. due to subsidies that could be either introduced or taken back.

While the overall automobile market is forecasted to grow next year, a potential recession could result in weaker-than-expected automobile sales. A major recession does not look very likely today, but might still happen due to the monetary tightening we have seen in the US and many other countries. In that case, overall automobile sales could disappoint, and that could also hold true for the EV segment of the automobile market.

Top 3 Electric Vehicle Stocks For 2024

There are many EV stocks one can choose from, with a range that has a $800 billion giant -- Tesla ( TSLA ) -- on the one end and micro-caps with sub-$100 million market capitalizations such as Mullen Automotive ( MULN ) on the other end. There are companies that produce hybrids, companies that produce BEVs, companies that produce inexpensive vehicles and companies that produce high-end vehicles, companies that are based in the US and ones that are based in China, and so on.

When choosing my three favorites, I looked at several factors. First, I considered the company's growth rate -- the EV market is a growth market, and many EV investors are growth investors, so business growth naturally plays an important role when deciding which EV stock to invest in.

Second, I considered valuation -- while growth investors oftentimes don't emphasize valuations enough, it still makes sense to not overpay for stocks. Cisco (CSCO) during the dot.com bubble has proven that business growth alone does not make for an attractive investment -- valuations should be considered as well.

Third, I considered execution: Some EV companies are having a hard time growing as fast as they have forecasted, while other EV companies are underpromising and overdelivering. A company that constantly has manufacturing problems is performing worse than a company that is hitting new record numbers every month. A company that promises new features year after year, but fails to deliver said feature (e.g. Tesla's robo-taxis) is performing worse than a company that is able to deliver what it says it will deliver.

Based on these factors, these are my top 3 picks right now:

1: BYD

BYD (BYDDY)(BYDDF) is pretty unknown in the West but is the largest EV manufacturer in the world when one counts both BEV sales and PHEV sales. The Chinese EV player is active in many different markets, including consumer EVs, and commercial EVs, and it also manufactures and sells batteries to both EV companies -- it is a supplier for Tesla, for example -- and to consumers, where BYD's batteries can be used for home battery systems.

BYD has executed extremely well in the recent past, with its deliveries soaring despite a harsh macro picture in China and other parts of the world:

While Tesla has shown highly attractive revenue growth as well, BYD saw its revenues rise even faster over the last three years. It also did not depend on discounting to push up its deliveries, which has translated into significant margin improvements relative to Tesla, its main competitor:

While some Tesla bulls don't want to hear this, it looks like BYD is winning the market share war in China -- its margins have been hitting multi-year highs, while Tesla was forced to discount its models so much that its margins have been hitting multi-year lows.

BYD thus combines strong growth and execution with improving margins and returns on capital, and yet, BYD is far from expensive. Based on forecasted earnings for the current year, BYD is trading for just 17x net profits, while the 2024 earnings multiple is just 15. That's more expensive compared to how legacy automobile companies are valued, but considering the EV exposure and the strong growth rate, a mid-teens earnings multiple for an EV leader seems far from excessive to me.

2: Li Auto

Li Auto ( LI ) is another Chinese EV player. While not as large as BYD or Tesla, Li Auto has found a nice niche where it has executed very well in 2023. Li Auto sells vehicles with range extenders that are ICE-powered, meaning consumers that buy Li's vehicles don't have to worry about battery range and charging options too much, while still benefitting from the EV advantages such as fast acceleration and no local emissions when they drive their vehicle in the "normal" electric mode.

This seems to resonate well with consumers, as Li Auto has been able to grow its sales at a drastic pace in the recent past. In November, Li Auto managed to deliver 41,000 vehicles , which was up by a drastic 173% year over year, making for one of the best growth rates in the entire EV industry. And with an annualized sales pace of around 500,000 vehicles, Li Auto is not a small start-up any longer, but rather one of the more important players in this space. For December, Li Auto targets 50,000 deliveries, which would make for a month-to-month increase of more than 20% and which shows that the company's momentum is very strong right now. This is also underlined by the fact that the company has been able to grow its deliveries during every single month of 2023, which is a strong feat that shows that the company is very good at avoiding problems during the ramp-up process -- there's no "production hell" at Li Auto.

Li Auto currently trades for 25x 2023's expected net profit, which is not expensive for an ultra-fast-growing EV player. Looking at 2024, the earnings multiple is just 19. The fact that profitability has improved considerably over the last year indicates that the company is not sacrificing margin in order to push deliveries, which is good for shareholders.

3: Rivian Automotive

Rivian Automotive ( RIVN ) is, unlike BYD, Li Auto, and Tesla, not profitable. I still included it in this list as its execution looks strong, since growth is compelling, and since the valuation on a price-to-sales basis is not excessive.

Rivian has gotten a lot of praise for its vehicles, including from critics -- the company's R1T won the 2022 MotorTrend Truck Of The Year Award, for example -- and from consumers: The R1T has the highest satisfaction ranking of any vehicle in the 2023 J.D. Power U.S. Electric Vehicle Experience Ownership Study. While Rivian is losing money on every EV sold for now, that has also been the case at BYD, Tesla, and so on in the past. A company that builds great products (and the strong reviews from critics and customers indicate Rivian builds great products) will ultimately have a good chance of becoming quite profitable, I believe.

Rivian is also active in the commercial EV space, via its deal with Amazon ( AMZN ), but the company has also recently gotten orders from companies such as AT&T ( T ). This market segment could balance out potential weaknesses in the consumer EV market in the future and could thus be good for Rivian's resilience.

In 2023, Rivian will produce around 54,000 vehicles this year and has been increasing this guidance recently, indicating the management team is more likely to underpromise and overdeliver, which is a good thing. In 2024, Rivian will begin construction of its new Georgia facility that could push up production capacity to around 400,000 vehicles per year. Of course, Rivian will still have to work hard to hit profitability in the future, but there are some major positives here.

Looking at the stock's valuation, we see that Rivian trades at a substantial discount to the biggest EV player in the US, Tesla:

Tesla trades at 6.7x next year's revenue, while Rivian, which is growing a lot faster, trades at 2.6x next year's revenue. RIVN's sales grew 149% during the most recent quarter, versus a meager 9% for Tesla. For a more aggressive EV investor who doesn't mind that Rivian is not profitable yet, that could be quite an attractive setup, although more conservative investors will likely want to avoid RIVN until the company has hit profitability.

Takeaway

There are good EV companies and bad ones, and investors should not discount the risks in this space -- the automobile industry is cyclical, margins are generally not very high, and there is a lot of competition. But for those who want exposure, BYD, Li Auto, and Rivian look the most promising to me. While Tesla is the market cap king in this space, it is pretty pricey and its growth has lagged behind what competitors have been delivering recently.

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