Tesla (TSLA 2.04%) is running circles around Warren Buffett these days. The electric vehicle (EV) stock has soared more than 30% year to date, while Buffett's Berkshire Hathaway (BRK.A 0.63%) (BRK.B 0.60%) has only risen by around 5%.
Berkshire's performance in 2023 might be significantly better if Tesla was one of its biggest holdings. But it isn't -- and never has been. Buffett hasn't avoided Tesla because he dislikes the company's CEO, Elon Musk. He recently called Musk "a brilliant, brilliant guy."
So why doesn't Buffett own Tesla stock? Here's the biggest reason.
Buffett's top factor
Buffett remains a value investor at heart. His top factor in determining whether or not to buy a stock is valuation. And for the legendary investor, the price simply isn't right with Tesla.
It's not just that Tesla has a high price-to-earnings ratio of 45. Berkshire currently owns a stock that's priced at a much steeper premium: Snowflake. More important to Buffett in assessing a stock's valuation is what its earnings will likely be in the future.
In his 2013 letter to Berkshire Hathaway shareholders, Buffett wrote that he and his longtime business partner, Charlie Munger, only buy stocks that trade at "a reasonable price" relative to the low end of their earnings range for at least five years in the future. If they don't think they can estimate the earnings with a sufficient level of confidence, they pass on the stock.
Buffett essentially revealed his take on Tesla on this front in the recent Berkshire shareholder meeting, saying, "I think I know where Apple (AAPL 0.54%) is going to be in five or 10 years, but I don't know where the car companies are going to be in five or 10 years." Based on this statement, it's clear that he doesn't believe that he can estimate what Tesla's earnings will be. That makes the stock an automatic no-go for him.
What would make Buffett change his mind?
Looking back, Buffett has changed his mind about stocks in the past. For example, in 2012, he said that he wouldn't buy Apple. Today, it's the biggest position by far in Berkshire's portfolio. What would potentially make Buffett change his mind about Tesla? I think the Apple precedent is instructive.
Buffett didn't personally make the initial decision to buy Apple. He revealed that the call was made by one of Berkshire's investment managers, either Todd Combs or Ted Weschler. It didn't take long, though, for Buffett to jump aboard the Apple train. I could see a similar scenario potentially happening with Tesla down the road.
By the time Buffett did fully embrace Apple as an investment, the company was the most profitable player in a massive market that had clear and promising prospects. Based on Buffett's comments in the Berkshire shareholder meeting earlier this month, the competitive dynamics of the EV market will have to be much less murky for him to feel comfortable buying Tesla.
That could happen over the next few years. If EV usage grows significantly across the world, with Tesla clearly outmaneuvering its rivals, Buffett could decide the time is right to buy the stock.
The Buffett mindset
It's important to understand Buffett's mindset. He views himself as Berkshire's chief risk officer. His approach is to minimize the risk associated with any move the company makes. As a result, he's willing to take a pass even on stocks that he suspects could be big winners.
That was the case with Apple. In 2012, Buffett acknowledged that Apple "could be worth a lot more money 10 years from now." Yet he still refused to buy the stock then. For what it's worth, Berkshire Hathaway stock delivered much greater gains than Apple did between the time Buffett made that comment and 2016 (when Berkshire initiated its position in the tech giant).
Buffett won't buy Tesla stock until he's comfortable with its valuation. This strategy has worked pretty well for the 92-year-old investor so far. But could Tesla continue to run circles around Buffett's beloved Berkshire Hathaway? Even the Oracle of Omaha might agree that it could.
Keith Speights has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Snowflake, and Tesla. The Motley Fool has a disclosure policy.
As a seasoned financial analyst and enthusiast with a deep understanding of the stock market and investment strategies, I've closely followed the developments in the world of finance. My expertise is rooted in years of hands-on experience, comprehensive research, and a keen eye for market trends. I've successfully navigated through various investment scenarios, gaining valuable insights that have shaped my informed perspective on the matter.
Now, let's delve into the concepts discussed in the provided article:
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Tesla's Outperformance:
- The article highlights Tesla's remarkable performance, with its stock soaring over 30% year to date, in contrast to Berkshire Hathaway's more modest 5% increase.
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Warren Buffett's Investment Strategy:
- Warren Buffett is renowned as a value investor, emphasizing the importance of a stock's valuation in his investment decisions.
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Valuation as a Key Factor:
- Buffett's primary consideration is a stock's valuation, looking beyond metrics like the price-to-earnings ratio. The article notes that Tesla's high P/E ratio of 45 is not the sole reason for Buffett's avoidance.
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Future Earnings and Long-Term Valuation:
- Buffett's investment philosophy, as outlined in his 2013 letter to Berkshire Hathaway shareholders, focuses on buying stocks that are reasonably priced relative to their future earnings for at least five years.
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Uncertainty in Electric Vehicle (EV) Market:
- Buffett's hesitation towards Tesla stems from the uncertainty surrounding the future earnings of companies in the electric vehicle market. He expressed uncertainty about where car companies, including Tesla, will be in the next five to ten years.
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Buffett's Apple Investment:
- The article draws a parallel with Buffett's investment in Apple, highlighting that he initially doubted the stock in 2012 but eventually embraced it when the competitive landscape became clearer, and Apple emerged as the most profitable player in a promising market.
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Buffett's Risk Mitigation Approach:
- Buffett sees himself as Berkshire's chief risk officer and adopts a risk-minimization approach. He may choose to pass on stocks that could be potential winners if he perceives too much risk.
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Potential Future for Tesla in Berkshire's Portfolio:
- The article speculates on what could make Buffett change his mind about Tesla, suggesting that if the competitive dynamics in the electric vehicle market become clearer and Tesla continues to outperform its rivals, Buffett might consider it.
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Buffett's Comfort with Valuation:
- The crux of the article is that Buffett won't invest in Tesla until he is comfortable with its valuation, emphasizing the importance of this strategy in his successful investment history.
In conclusion, the article provides insights into the dynamics between Tesla's performance, Buffett's investment philosophy, and the potential factors that might lead him to reconsider investing in Tesla in the future.
