Tesla (TSLA 2.46%) 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 1.75%) (BRK.B 1.85%) 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.