Why isn’t Buffett investing in Tesla (NASDAQ:TSLA)?
Capital costs and an uncertain future stop the “Oracle of Omaha” from investing.
I recently read that Musk wanted Buffett to invest in Tesla after Buffett expressed great admiration for Musk. I agree that Musk is worthy of admiration because Musk did found PayPal, Tesla, SpaceX and so on.
However, Buffett said that he also can’t invest in Tesla because of the high capital costs (it takes a lot of investment money to maintain the car’s competitive advantage) and that Buffett can’t predict Tesla’s market share in 5 years.
Moreover, Buffett’s longtime business partner Charlie Munger also voiced his opinion and said that Berkshire could have bought Tesla when its market value was $200 million, but now it is worth $800 billion. So, even if Berkshire invests, how much can Tesla’s market value realistically grow?
After a little research, I can say two things about Buffett’s comments. I agree that Tesla needs a lot of capital to maintain a competitive advantage, but I would argue that Tesla has a high chance of maintaining its market leadership in 5 years.
Here are my reasons.
Large capital.
I admit that Tesla’s financial statements are hard to read, and it took me quite a while to understand them. But if you read from right to left, you can see in the cash flow statement that Tesla was to increase purchases of fixed assets from 3 billion in 2020 to 7 billion in 2022.
In 2020, this investment was financed with debt and a public stock offering, but as the company became more profitable, Tesla began paying down debt and using cash from earnings to invest.
Even if you don’t follow the cash flow, the only thing you need to realize is that Tesla has to inject a lot of capital into its business.
I think from Buffett’s perspective, it’s a risky business because if you have a lot of assets (fixed assets), you need to replace them when they become obsolete (depreciation and amortization).
Part of the problem for Buffett is that he doesn’t know exactly which of those assets are buildings and which are tools.
As you can see from the table above, tools depreciate pretty quickly, so if you have a lot of car manufacturing plants with lots of tools, but the tools have to be replaced every 5 years, the amount of capital needed to keep the business afloat can be huge.
Long-term advantage.
I understand why Buffett says he can’t predict where Tesla will be in 5 years, mostly because he doesn’t drive. Apparently he drives a used Cadillac.
If you don’t own something, how can you know how good it is? Or, as Nassim Taleb says:
But I’d like to give you two mental models to answer why you can predict where Tesla is, regardless of the fact that you have no skin in the game.
Social proof.
I live where people like to look flashy. To keep up with the Joneses, they need to buy a Tesla – it’s to demonstrate that they care about the environment and can afford a nice car.
If everyone around you has a Tesla, you will feel more obligated to buy one too. As long as the car looks fashionable, people will continue to drive it and convince others that they need to drive it too.
I see the same thing with the iPhone. I don’t think it’s better than an Android phone or has more features, but all the less tech-savvy people I know tend to have iPhones.
This phenomenon is called social confirmation.
I think that as long as Musk continues to produce Teslas and sell them to the masses, we will continue to see them on the road.
Given the capital investments Tesla is making to build new and better electric cars, I think we will see Teslas both now and in the future.
And to be transparent, I don’t own a Tesla. I still drive a Toyota, but I have told myself that my next car will be electric.
I don’t know if it will be a Tesla or another brand, but I’m leaning toward Tesla because I’ve heard good things about it and have driven in one myself.
The Lindy Effect.
The Lindy Effect tells us that any inanimate object or idea that already exists can be predicted to have a useful life twice as long as it does now.
Since Tesla has been making cars for 15 years, starting with the Roadster model in 2008, the Lindy effect tells us that Tesla will be making cars for another 15 years if we make this prediction today.
That’s safe to assume since we’ve been using cars for over 130 years.
And I think that as long as Musk’s plan for a very affordable electric car is followed, Tesla will continue to exist because price matters to the average car owner – at least according to my observations.
Right now, I’m leaning more towards Buffett’s view that he’s not sure Tesla will still be the market leader in 5 years.
Given how slowly other car brands are releasing reliable electric models, I think Tesla will probably still dominate over the next 5 years.
Conclusions.
I agree with Buffett that the capital cost of running Tesla is quite high, and it looks like it will increase in the future.
I am more optimistic about Tesla’s future than Buffett. Predicting the future is difficult, but based on the evidence available, things don’t seem to be changing too much after the fact.
Finally, Tesla has positioned itself as the king of electric cars, so I don’t know how easy it will be for other brands to displace Tesla from that pedestal – especially given how Musk can drive prices down and still make a small profit.
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