Warren Buffett should “take a position in Tesla”, according to Elon Musk. “It’s an obvious move”.
In fact, it’s far from obvious.
Berkshire Hathaway’s mounting cash pile now stands at a record $189 billion, but the idea Buffett would deploy that cash in Tesla is not obvious (disclosure: I own shares in Berkshire).
Last year, Buffett complained that the auto industry “is just too tough”. While Buffett believed he knew where Apple would be in five or 10 years, he said he didn’t know where the major car companies would be over that period.
Now, Berkshire does have a long-standing position in Chinese EV company BYD, but the stock was very cheap when it bought it in 2008. Currently, BYD trades on less than 19 times estimated earnings and on a price-sales ratio of less than one.
[ Berkshire cash hoard hits new high in absence of attractive deal targetsOpens in new window ]
In contrast, Tesla trades on almost 70 times estimated earnings and on more than six times’ sales. The stock may have more than halved since peaking in late 2021, but it’s not cheap.
[ Chinese electric cars power ahead of ‘inferior’ US rivalsOpens in new window ]
Buffett isn’t a slave to valuation ratios, having been convinced by his former sidekick, the late Charlie Munger, that it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price. However, Tesla’s current position – price cuts, falling sales, mass lay-offs, increased competition – looks far from wonderful. Buffett is unlikely to think otherwise.
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