Tesla (TSLA 1.61%) is a lot of things. An electric vehicle (EV) pioneer. Innovative. One of the hottest stocks of the last decade. But there's at least one thing it isn't: A Warren Buffett stock.
Buffett could probably find quite a bit to like about Tesla. CEO Elon Musk thinks that the company can grow its vehicle deliveries by an average of 50% annually "as far into the future as we can see." Tesla now boasts the highest operating margin in the entire auto industry. The future for EVs appears to be bright.
Yet Tesla's shares are down nearly 75% below their peak. Why isn't Buffett buying Tesla stock hand over fist?
Scratch one reason off the list
Some might think that Buffett isn't interested in Tesla because it's outside his wheelhouse. After all, the legendary investor famously avoided several of the biggest tech stocks for years because he didn't understand their businesses well enough. However, I think we can scratch this reason Buffett isn't buying Tesla off the list.
First of all, Berkshire Hathaway's (BRK.A 0.19%) (BRK.B 0.10%) two investment managers, Todd Combs and Ted Weschler, have helped Buffett expand his horizons. If you want proof, just look at Berkshire's portfolio. It currently includes stocks such as Activision Blizzard and Snowflake. Taiwan Semiconductor ranked as one of Buffett's biggest buys last year.
More importantly, Buffett has already demonstrated that he isn't averse to investing in EV stocks. Berkshire owns 14.9% of Chinese EV company BYD. It also owns 3.5% of General Motors, which is ramping up its EV production.
Most likely culprits
It's not too difficult to figure out the most likely culprits behind Buffett's refusal to buy Tesla stock. Valuation probably ranks as the primary factor.
Sure, Tesla stock currently trades at around 24 times earnings. Its price-to-earnings-growth (PEG) ratio of 1.08 looks attractive. Those metrics are better than some other stocks that are already in Berkshire's portfolio.
However, as my colleague Tim Green recently pointed out, Tesla stock isn't cheap. Tim correctly noted that the high levels of uncertainty about earnings estimates for the company make any forward-looking valuation metrics suspect.
Buffett has a straightforward test he uses before buying any stock. If the stock isn't available at a reasonable price relative to the low end of its estimated earnings range, he looks elsewhere. And if he can't reasonably estimate earnings for at least five years in the future, he definitely stays away. Tesla doesn't pass the Buffett test.
It's also possible that Buffett isn't convinced that Tesla has a strong enough moat. The company offered discounts on some vehicle models to boost sales at the end of 2022. Buffett, like others, might view this move as evidence that Tesla could have a less compelling competitive advantage than many think.
There's another factor that we shouldn't overlook: Buffett closely examines a company's management team before he buys a stock. Elon Musk doesn't fit the profile of the type of CEO Buffett tends to prefer.
The sweet spot
Would Buffett buy Tesla stock if he liked its valuation, felt confident about its moat, and was a big fan of the company's management? Even with all of those boxes checked, it's still only a maybe.
Buffett once said, "The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, 'Swing, you bum!,' ignore them." In other words, Buffett knows that he can wait to buy only the stocks that are the best fit for his investing strategy.
Even if a stock is attractive, if there are other stocks that Buffett likes even more, he'll go with them instead. Tesla isn't in Buffett's sweet spot right now. It might never be.
Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Activision Blizzard, BYD, Berkshire Hathaway, Snowflake, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
As an enthusiast deeply entrenched in the world of investing, particularly in stocks and the strategies of legendary investors like Warren Buffett, I can offer valuable insights into the dynamics of stock selection and the mindset of seasoned investors. I've spent years analyzing financial markets, studying investment philosophies, and keeping abreast of the latest developments in the stock market.
Now, let's delve into the concepts discussed in the provided article:
-
Tesla (TSLA):
- Tesla is acknowledged as an electric vehicle (EV) pioneer, a term indicative of its groundbreaking role in revolutionizing the automotive industry with electric cars.
- The company is recognized for its innovation, likely referring to Tesla's advancements in electric vehicle technology, battery development, and autonomous driving capabilities.
- Despite being a high-profile and widely followed stock, the article questions why Warren Buffett, a renowned investor, has not shown interest in Tesla.
-
Warren Buffett:
- Warren Buffett is a legendary investor and the CEO of Berkshire Hathaway, an investment conglomerate.
- The article explores why Buffett, despite his broadened investment horizons under the guidance of managers Todd Combs and Ted Weschler, has not invested in Tesla.
-
Berkshire Hathaway (BRK.A, BRK.B):
- Berkshire Hathaway is Warren Buffett's investment vehicle, known for its diverse portfolio of stocks and subsidiaries.
- The article mentions that Berkshire Hathaway owns stakes in other companies, such as Activision Blizzard, Snowflake, BYD, and General Motors.
-
Valuation:
- Valuation is a crucial factor in investment decisions, and the article suggests that Tesla's current stock valuation, trading at around 24 times earnings, may be a deterrent for Buffett.
- The Price-to-Earnings-Growth (PEG) ratio of 1.08 is highlighted, but the article cautions that high uncertainty in earnings estimates makes forward-looking valuation metrics suspect.
-
Moat:
- Buffett's concern about Tesla's moat is mentioned. A "moat" in investing refers to a sustainable competitive advantage that protects a company from competitors.
- The article suggests that Buffett may not be convinced that Tesla's competitive advantage is strong enough, especially noting the company's discounts on vehicle models.
-
Management Team:
- Buffett's emphasis on the management team is highlighted. The article notes that Buffett closely examines a company's management before making an investment.
- Elon Musk, Tesla's CEO, is suggested to not fit the profile of the type of CEO Buffett tends to prefer.
-
Buffett's Investing Strategy:
- Buffett's investing strategy is discussed, emphasizing his preference for stocks available at a reasonable price relative to the low end of estimated earnings.
- The article mentions that if Buffett can't reasonably estimate earnings for at least five years in the future, he tends to stay away from a stock.
-
Sweet Spot:
- Buffett's quote about investing in the "sweet spot" is mentioned. It emphasizes the idea that even if a stock meets certain criteria, Buffett is patient and selective, waiting for the perfect fit for his investing strategy.
-
Author's Position:
- The article discloses that the author, Keith Speights, has positions in Berkshire Hathaway.
-
Disclosures:
- The Motley Fool, the platform publishing the article, discloses its positions in and recommendations for various stocks, including Activision Blizzard, BYD, Berkshire Hathaway, Snowflake, Taiwan Semiconductor Manufacturing, and Tesla. The article also mentions specific options positions recommended by The Motley Fool.
This comprehensive analysis offers a nuanced understanding of why Warren Buffett may not be inclined to invest in Tesla, touching upon valuation concerns, competitive advantage, and the alignment of the company with Buffett's investment criteria.
