How BYD Can Become a Lucrative Winner for Investors

Key Points

• The EV maker's stock has doubled Tesla's gains over the past five years.

• BYD is expanding its vehicle offering to include high-priced luxury models.

• Racing tracks for the public should aid the company's brand image.

• 10 stocks we like better than BYD Company ›

When it comes to the electric vehicle (EV) industry, most investors instantly think of Tesla. That's fair -- Tesla arguably has done more than any company to change the game for the EV industry by making EVs nearly mainstream in popularity.

But over the past five years, shares of Chinese EV maker BYD have surged 377% higher, more than double Tesla's 157% gain, and there's reason to think BYD is just getting started. Just look at its most recent move.

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More like Ferrari?

When investors consider BYD, they most likely think of the Chinese juggernaut EV maker that has caught Tesla in global markets and is undercutting the competition with rock-bottom pricing. What investors probably don't think of when BYD comes up in conversation is that it might want to be the next Ferrari.

The difference between the two is stark. Ferrari can sell a vehicle for $4 million, while BYD tries to get its selling price under $30,000, a price level that few competitors can match. A recent example is BYD's launch of its new electric SUV, the Atto 2, in the United Kingdom with prices starting from 30,850 pounds. While still a bit higher priced than its target, BYD is still undercutting much of the competition in Europe with its Atto 2 and the Dolphin Surf.

This leaves much upside for BYD if its focus moves to the premium and ultra-premium markets. Its recent move suggests that it wants to do just that. BYD wants to change, or at least add to, its brand image by offering luxury models over $200,000. That would certainly begin to reverse the brand image known for mainstream volume and affordability.

BYD is even going as far as building entire automotive racing and testing tracks for potential customers to step in and play in a different world. This isn't all for show, either. The Chinese automaker already opened an "all-terrain circuit" in Zhengzhou earlier this month and plans to invest 5 billion yuan, or $700 million, to set up more tracks open to the public.

How it works

For a fee of 599 yuan, or less than $100 , potential BYD customers and racing fans alike can get an hour-long drive of the test track, including in a popular Yangwang U9 with a price tag of 1 million yuan. The test track can give drivers all sorts of experiences, including speeding away on a straightway, a zigzag maneuver, or even emergency swerves designed to test a vehicle's agility. There's a dune built with over 6,000 tons of sand, and even a pool where potential owners can test the vehicle through water hazards.

Image source: BYD.

This is a little different than most test tracks automakers build, as those are generally kept private for a company's own testing of new models. But this development is more like a "Halo car," in which a company will build an ultra-high-end model to drive up intrigue and interest in the vehicle's more standard trims. The difference is that BYD isn't doing this for a segment or model -- it's doing this for its entire brand.

What it all means

There's obviously one enormous advantage to selling ultra-premium vehicles priced at over $200,000, and that's juicier margins. Ferrari's operating margins dwarf those of its automotive competitors, and BYD wants to have its cake and eat it too. It just might be able to pull off both its highly affordable lineup and ultra-luxury. The test tracks will help drum up interest in BYD's more premium models, and perhaps change its brand image from affordable vehicles into something more Ferrari-like, with racing heritage and high-priced models.

That said, becoming Ferrari overnight isn't easily achieved. That's why Ferrari stock trades at a premium -- it has durable competitive advantages such as brand image and pricing power. However, if BYD even makes progress toward creating a market for its higher-priced vehicles, it could be a lucrative change for long-term investors.

Should you invest $1,000 in BYD Company right now?

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends BYD Company and Ferrari. The Motley Fool has a disclosure policy.