Tesla (TSLA) seems overvalued compared to traditional automakers like Ford (F) and Toyota (TM). Less noticed, but perhaps more significant, is the huge valuation gap that has opened up between Tesla and its closest rival in electric vehicles.


BYD Co. (1211.HK, 002594.SZ) had a much better fiscal third quarter than Tesla, with which it vies for the top spot as the world's largest electric car maker. Although Tesla still has a narrow lead in deliveries, BYD's electric vehicle production surpassed Tesla's for the first time. Those numbers don't include hybrids, which BYD, unlike Tesla, also makes.


The Chinese leader has been growing faster than Tesla for some time. In addition to a newer lineup and lower prices, BYD has the advantage of being the top seller of electric vehicles in China, not the U.S. While sales of pure electric vehicles are now rising in the US, such vehicles already account for more than a quarter of the much larger Chinese car market.

Meanwhile, Tesla also had a terrible quarter. As the end of the quarter approached, analysts cut their estimates, citing production halts in Shanghai and Fremont, Calif., to accommodate the Model 3 refresh, but the final global deliveries of 435,059 were still nearly 6% below FactSet's average estimate.


Were Tesla's deliveries below expectations due to technical issues with production and model upgrades, or did CEO Elon Musk slow production because this year's price cuts didn't spur more demand than he had hoped? That's a key question ahead of the company's full fiscal third-quarter report, scheduled for Oct. 18. In its sales report, Tesla said only that the company would stick to its delivery target of 1.8 million vehicles in 2023. That means fourth-quarter production would need to reach about 450,000 vehicles, in line with this year's average.


Byd's main competitive advantage is that the company has a battery business, which allows it to produce high-quality electric vehicle powertrains at a lower price than competitors. Byd uses lower-cost lithium-iron phosphate batteries, rather than the more energy-dense high-nickel ones that dominate western markets, and installs them directly into the body structure to offset the performance disadvantage.
Unlike Tesla, BYD doesn't seem to be preparing for a driverless future. UBS recently dismantled BYD's Seal model and found it had off-the-shelf driver assistance features. The choice appears to reflect BYD's overall approach: While Tesla is focused on technology leadership, BYD is offering a very attractive package at an affordable price, said Patrick Hummel, an analyst at UBS who led the project.


As electric vehicles spread beyond the Tesla fans who were early buyers of electric vehicles, price performance could become a key selling point for electric vehicles for years to come. While BYD can't enter the U.S. market due to geopolitical reasons, the company has recently entered the European market. Ubs expects BYD to grab market share quickly.


While BYD's growth prospects are arguably stronger than Tesla's, it trades at about 19 times earnings, compared with 59 times for Tesla. At the start of the year, BYD's P/E ratio was about the same as Tesla's, but the resurgence of US tech stocks, especially investors' pursuit of AI for everything, has pushed Tesla's P/E to a level far higher than BYD's. It's another reminder that Tesla's $883 billion market cap has nothing to do with electric cars.