Warren Buffett isn’t typically a big fan of car companies. While his holding company, Berkshire Hathaway, owns a stake in General Motors, this has been steadily shrinking for some time.
This is one of the main reasons the Oracle of Omaha has stayed well clear of Tesla shares. But something has happened recently that might just cause that to change.
Predictability
The first thing Warren Buffett looks for in an investment is predictability. Specifically, it’s predictability in terms of the earnings the company will produce in the future.
Investing, according to Buffett, comes down to an equation that is simple but not easy. It requires the future cash a business will generate to offer a good return on the price at which it is available today.
Obviously, this this is impossible to judge if the company’s future earnings are not predictable. If a business is outside Buffett’s circle of competence, it’s not one he can invest in.
Traditionally, this has led Buffett to favour companies like railroads and utilities businesses for the Berkshire portfolio. These have steady, predictable cash flows that are easy to assess.
With Tesla, the opposite has been true – the innovative nature of its products makes it extremely difficult to forecast accurately. But this might be in the process of changing.
Tesla’s gambit
Recently, Tesla has somewhat shifted its strategy. The key to this is the introduction of the North American Charging Standard.
Recently, the company has signed deals with Ford, General Motors, Rivian, and others to allow them to use its Supercharger stations. There are positives and negatives to this.
The negative is that other companies save money by not having to build their own charging infrastructure. And the cash they save can be used to develop cars that will compete with Tesla’s.
The positive, though, is that it should allow the company to develop a steady and predictable revenue stream. Owning the infrastructure allows it to benefit from the success of its competitors.
In my view, this makes Tesla’s future income much more predictable. And as an owner of infrastructure, it makes it much more like the kind of company Warren Buffett likes.
A future Buffett stock?
Buffett looks for companies that have a competitive advantage – an economic moat. That’s hard to find in car companies, but the charging part of Tesla’s business might have one.
To my mind, that makes it just the kind of stock that might fit in the Berkshire Hathaway portfolio. But I don’t expect to see this any time soon.
There’s more to Buffett’s investment strategy than just finding businesses that can generate good cash flows going forward. They also need to be available to buy at a good price.
At the moment, I don’t think Tesla shares fit the bill. And I’m pretty sure they don’t have the built-in margin of safety that the Berkshire Hathaway CEO looks for in a stock to buy.
Nonetheless, I think the introduction of the North American Charging Standard makes Tesla more like the kind of stock that Buffett might buy. I wouldn’t rule it out in the future.
