Warren Buffett doesn’t buy unproven growth stocks. Instead, he has enjoyed probably the most successful investing career ever by sticking to businesses with strong brands, durable competitive advantages, and proven cash flows stretching back decades.
But in 2008, he and partner Charlie Munger threw caution to the wind and invested roughly $230m into an unproven Chinese EV start-up called BYD (OTC:BYDD.Y). Munger was impressed by founder Wang Chuanfu, calling him a “combination of Thomas Edison and Jack Welch”.
At the 2009 Berkshire Hathaway annual meeting, Buffett admitted that it might look like he and Charlie Munger had “gone crazy” investing in a little-known Chinese battery and EV company. It was certainly a break from tradition.
But this move turned out to be anything but crazy. In 2022, when Berkshire first started selling the 225m shares it had acquired, the investment was up more than 20-fold.
Over the weekend, it was reported that Berkshire has now fully exited its BYD position. According to CNBC, it had gone up roughly 3,890% since 2008!
To give a cricket analogy, I see Berkshire as the patient Test batter of investing, waiting for the right ball to safely score runs/returns. But with BYD, it swung like a T20 hitter and ended up smashing the ball straight out of the ground!
Eating Tesla’s lunch
BYD has made incredible progress in recent years. It has not just survived a ferociously competitive Chinese EV and plug-in hybrid market, but gone on to dominate it, leaving Tesla in the dust over there.
The company now has its eyes set firmly on global expansion. Factories in Thailand, Hungary and Brazil have sprung up, while others in Turkey, Indonesia and Cambodia are in the works.
I’m seeing more of its vehicles on the road in the UK. Indeed, at the weekend, my Uber driver said he was eyeing up a brand new BYD at what he considered a very attractive price. When I asked why not Tesla, he let out a long laugh.
According to the European Automobile Manufacturers Association, BYD’s vehicle registrations in Europe surged by 225% year on year in July. Tesla’s declined by 40%.
Should I buy BYD stock?
Tesla CEO Elon Musk has long warned about this competitive threat. In January 2024, he said that if no trade barriers are established, Chinese EV makers “will pretty much demolish most other car companies in the world. They’re extremely good.”
Now, this is where I’m cautious. Due to tariffs and the US-China rivalry, I don’t ever expect BYD to succeed in the US.
And while plants in Hungary and Turkey will circumvent EU tariffs on Chinese EVs, I expect BYD’s European margins to be significantly lower than cars for Chinese consumption. It still faces lots of domestic competition in Europe over the long run.
Meanwhile, production in China has fallen for two straight months, the first time that has happened since 2020. This might not matter long term, but it shows how even BYD isn’t immune to the brutal EV price war.
Weighing things up, I’m not going to invest due to these competitive risks.
But after falling 20% since May, the stock is trading at 16.5 times forward earnings. Unlike Tesla, that’s hardly a bonkers valuation, which could make BYD worth a closer look for investors.
