Warren Buffett isn’t buying Tesla shares despite the huge sell-off. Why is that?

Dr James Fox explains the reason why he thinks Warren Buffett isn’t buying Tesla stock despite it having a huge $700bn wiped off its market value.

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Warren Buffett is among the most famous investors worldwide, known for his value-investing strategy. The so-called ‘Oracle of Omaha’ is the chairman and CEO of Berkshire Hathaway and has a net-worth of over $100bn as of November 2022, making him the world’s sixth-wealthiest person.

Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. So why isn’t Buffett buying shares in Tesla (NASDAQ:TSLA)?

The Elon Musk firm has seen $700bn wiped off its market value over the past 18 months, most of it in the past four months. Maybe this electric vehicle (EV) giant is still too expensive.

Valuation

Buffett’s preferred EV stock isn’t Tesla. The US investor backed BYD in 2008, and the decision appears to have been a good one.

The veteran investor says he only invests in sectors and companies that he understands. As he invests in BYD, I think it’s fair to say he knows the industry. So this can’t be the reason he hasn’t invested in Tesla.

Looking specifically at the last year, BYD — a Chinese automotive firm with a heavy leaning towards the EV market — has fallen 15%. But that’s nothing compared to its peers. Tesla stock is down 65% over 12 months.

And despite Tesla’s huge sell-off, it’s still more expensive that BYD, according to several metrics. For example, Tesla has an EV-to-sales ratio of 4.58 versus BYD’s 2.04.

However, according to earnings-related metrics, Tesla and BYD share similar valuations. The EV-to-EBITDA ratio of Tesla is 21, while BYD’s is 26. In fact, here, BYD appears more expensive. So maybe valuation isn’t the reason?

Well, there’s plenty of uncertainty about Tesla’s earnings going forward. Growth is slow and margins are coming under pressure. That’s very concerning for investors and it makes the above calculations slightly meaningless. 

Tesla had boosted the best margins in the sector, but with price cuts in the US and extended sales incentives in China, margins are likely to come under substantial pressure. Despite these incentives, Tesla still missed its delivery targets in the final quarter.

As a value investor, Buffett looks for companies that are undervalued and offer him a margin of safety. And with concerns about Tesla’s performance over the next few years, valuation could well be the issue.

Could there be another reason?

Buffett tends to invest in stable and occasionally unexciting companies. I’d wonder if Musk might be a little too ‘eccentric’ for the 92-year-old investor. After all, Musk once said that he thought his own company was overvalued. Some will say he’s a genius, but he’s probably partially responsible for the volatility we’ve seen this year.

It’s also worth considering that now might not be the right time for Buffett. In a baseball analogy, he once said that “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, Tesla might not be in that sweet spot right now.

For me, I’m keeping a close eye on Tesla but at it’s current price, it’s not for me. I think there a several Chinese EV companies — including NIO and Li Auto — that look more promising investments.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Li Auto and Nio. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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