Warren Buffett, Tesla stock and a gas station
Berkshire Hathaway (BRK.B), led by legendary value investor Warren Buffett, has been gradually selling its shares in Chinese electric vehicle giant BYD (BYDDY), and has also reduced its stake in General Motors (GM) over the past year.
The electric car industry is experiencing turbulence, to say the least, and faces several headwinds – including the brutal price war. As the “Oracle of Omaha” backs off on EV stocks, should investors also follow suit? We take a closer look in this article.
Many EV stocks have fallen to record lows
Once a rapidly growing space that attracted huge interest from investors, the EV industry now looks completely different. Many electric car startups – including Fisker (FSR), Lucid Motors (LCID), Polestar (PSNY ) and Canoo (GOEV ) – are trading near their lowest levels ever. Rather than on the verge of becoming the “next Tesla”, as some of these companies were once hailed, they are now fighting for relevance – or worse, trying to stave off bankruptcy.
What’s wrong with the electric car industry?
The latest trigger for the collapse in EV stocks is concerns over demand after Fisker, Polestar and Lucid Motors all cut their production guide. Rivian (RIVN) is a notable exception here, as the company marginally raised its production guide for 2023 to 54,000 vehicles.
Concerns about electric car demand – especially amid the massive production capacity planned by legacy automakers, as well as pure-play electric car names – have been around for quite some time now, and both Ford (F) and General Motors have also toned down their aggressive electric car push. expansion plans.
The price war, which was initiated by Tesla (TSLA), also works to the detriment of electric vehicle companies. Lucid Motors, NIO (NIO), Ford, and Xpeng Motors (XPEV) are among the companies that had to cut car prices after Tesla reduced the prices of its models. The price war has now also squeezed Tesla’s profits – and the Elon Musk-run company’s operating margins fell below 8% in the third quarter of 2023.
Tesla, meanwhile, is optimistic that it can survive even by selling cars at zero profit and later making up the difference through the sale of autonomous technology. Musk, along with some other high-profile Tesla bulls, believe that autonomous driving accounts for the bulk of Tesla’s valuation.
Notably, Tesla also has the luxury of having $26 billion in cash and liquid assets on its balance sheet – and despite ongoing investments in expanding capacity, it generated free cash flows of $2.3 billion in the first nine months of 2023. But things look comparatively bleak for many other electric car start-ups. Funding has dried up for many of these names amid higher interest rates and the rising wave of general pessimism towards the industry.
What does Warren Buffett think of the electric car industry?
Although Buffett has not spoken directly about the electric car industry, we can draw a useful analogy from his views on the streaming industry – which hosted its own price war long before the electric car industry.
Speaking at this year’s annual shareholder day, Buffett said streaming companies would have to raise prices to survive. He added, “You have a bunch of companies that don’t want to stop. And who knows what pricing does during that. But anyone who tells you they know what pricing will do in the future is kidding themselves.
The legendary investor also drew parallels with a “price war” at his own local gas station when he was in his 20s. According to Buffett, there was a larger competitor a few miles away, and the two stations compared their prices to each other.
Buffett explained, “He determined our profit, because we looked at his price every day. And if we lowered the price, he would match it, and we couldn’t raise the price. And he made twice as many gallons, so he won.”
Tesla is the “larger gas station” in Buffett’s example.
For me, Tesla is the “bigger gas station” in Buffett’s example, and a living example of how a price war by a big company can squeeze out smaller players. The EV giant still maintains some of the best margins in the automotive industry, despite the price cuts – while many smaller EV players are at risk of going bankrupt, and even established legacy automakers are feeling the pain in their EV segments.
The near-term outlook for EV stocks looks hazy
The electric vehicle industry is going through the kind of upheaval that we last saw over a century ago in the car industry, where only a small handful of players survived while thousands of others went bankrupt.
Fast forward to 2023, and while we fortunately don’t have thousands of companies trying to lead the transition from internal combustion engines to electric cars, it’s still a large number. It would be reasonable to expect the number of EV players to decline by the end of this decade; while some companies may go bankrupt, others may merge – either among themselves or with the larger players to survive.
As for investors, those who are risk-averse should stay away from EV stocks for now as the turmoil looks far from over. It would also be wise to avoid companies with questionable product proposals and weak balance sheets.
However, the sector has long-term promise, and the transition from ICE to EVs will continue, although it may be relatively difficult to pick the winners of the race at this point. Look out for those players who have a compelling product, strong balance sheets, support from investors with deep pockets and effective management to overcome the current crisis.
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