Elon Musk thinks Warren Buffett should buy into Tesla Inc., tweeting that it’s an “obvious move.” Buffett’s Berkshire Hathaway Inc. now sits on enough cash to take a roughly one-third stake in the electric vehicle manufacturer at the current price. He’s no doubt seen some version of this movie before. But you actually don’t need to be a nonagenarian investing legend to have done that. If your memory stretches back 12 months or so, that will do. Take a look at this.
Just as in 2023, Tesla began 2024 in a funk. By late April of this year, the stock had fallen 43% to the lowest since its January 2023 doldrums when it reached levels last seen in the pandemic-afflicted summer of 2020. The stock has bounced hard over the past two weeks, just as it did last year.
What makes this episode of deja vu especially unnerving — or ought to, anyway — are a few slight, but essential, differences.
Tesla’s slide into 2023 came amid a generally bad quarter for the more speculative end of the market: tech stocks and cryptocurrencies both also limped into the year. Musk’s own heavy selling of Tesla stock, coinciding with his chaotic acquisition of Twitter Inc., didn’t help. Specific to Tesla, signs of a slowdown in the EV market, including the company’s missed delivery estimates for the last quarter of 2022, also spurred a selloff.
There are obvious echoes this year. Tesla reported weak results for the fourth quarter in January and then truly dreadful sales and financials for the first quarter in April. They were the logical conclusion of that nascent slowdown, and EV price war, glimpsed in early 2023 and which gathered steam throughout the next 12 months or so.
In both cases, Musk effectively talked his way out. Tesla’s rally in the first half of last year was sparked by the chief executive’s buoyant tone on an earnings call that January. Upfront, Musk addressed fears over slowing growth, saying he wanted to “put that concern to rest,” touting demand that “far exceeds production,” teasing potential demand for 2 million vehicles that year, and also “retaining the industry’s best operating margins.” Tesla followed this up in early March with an extensive, if somewhat rambling, investor day which, among other things, showcased a strategy to slash manufacturing costs in half, teeing up a long-anticipated sub-$30,000 EV. By July, with the stock having nearly tripled from its January trough, sales growth had picked up — albeit at the cost of a marked drop in vehicle pricing and margins. A broad rally in tech stocks, with Tesla lumped into the so-called Magnificent 7, helped.
In 2024, the 50%-per-year growth target for vehicle production has been abandoned. Preliminary data on Tesla’s shipments in China for April, released Tuesday, suggest pressure on demand hasn’t let up. Tesla’s stock, meanwhile, has been left in the dust by the likes of Nvidia Corp. The cheap so-called Model 2, built on revolutionary manufacturing, has been replaced by a vaguer promise of new models that are cheaper to produce but built on a mix of new and existing platforms. Operating margins now trail those at several of Tesla’s major competitors. Rather than hopes of high growth in EV sales predicated on big cost reductions, Musk has switched the narrative to autonomous driving and robotaxis, with an abruptly announced event scheduled for August and an abrupt visit to China to secure preliminary approval to market Tesla’s driver-assistance features there.
Tesla’s promise of self-driving, money-earning robotaxis has been around for years, of course. He now speaks of even potentially monetizing idle computing power in parked vehicles, like Uber for datacenters. The approval just won in Beijing for Tesla’s driver-assistance technology is preliminary and notable in part for its fortuitous timing. Judging from the rebound in the stock, though, enough investors take Musk at his word despite many missed deadlines.
To be clear, they are also taking him at his word despite the words having changed out of all recognition over the past year. Those enthused today about an imminent Tesla robotaxi revolution were similarly enthused in early 2023 about an imminent EV manufacturing revolution. At last year’s analyst day, they listened intently to the likes of Andrew Baglino and Rebecca Tinucci, the former heads of powertrain and energy engineering and charging infrastructure, respectively, talking about Tesla’s then future. Both are now gone, and suddenly so, along with a slew of other executives, the head of investor relations, and whole teams of people, including those building Tesla’s vaunted charging network. Schumpeterian renewal, you may say. But if so, that’s vastly different from the narrative of resilience that was being said not so long ago.
Another thing that is very different today, and probably not lost on Buffett, is Tesla’s valuation. When the stock hit bottom in January 2023, its earnings multiple was a mere 22 times. When it reached its low point for this year (so far), the multiple was more than double that — and at a premium to the S&P 500 of more than 200%. Incidentally, when Berkshire bought its original stake in Chinese EV powerhouse BYD Co Ltd, back in 2008, that stock traded on a single-digit multiple.
Despite the redux of pessimism and optimism, that chart shows that pessimism never really took hold this year, where it counts, at all. If Tesla’s now a value play, that’s anything but obvious.
Credit: Bloomberg
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