Berkshire Hathaway held its annual shareholder meeting last weekend, and some 40,000 people attended the event to hear CEO Warren Buffett and Vice Chairman Charlie Munger talk about business and the broader economy. The esteemed duo discussed everything from recent bank failures to artificial intelligence (AI), and Buffett provided some particularly interesting insight on the auto industry.
Specifically, Buffett said intense competition makes it difficult to identify a long-term winner in the electric vehicle (EV) sector at the present time, and he opined that any EV leadership in the future could be fickle, much like leadership among legacy automakers has been fickle in the past. Buffett made his point by referencing the rise and fall of the Ford Model T: "Henry Ford looked like he owned the world with the Model T... and 20 years later [Ford was] losing money."
Suffice it to say Buffett finds the auto industry tricky, and given his sterling track record as an investor -- Buffett has amassed a $100 billion fortune, and Berkshire has become one of the world's largest companies under his watch -- that insight should not be cast aside lightly.
To be clear, Berkshire has a small position in General Motors, so Buffett is not completely opposed to owning stock in automakers. That said, he made some excellent points last weekend. The auto industry is very competitive and capital intensive, and maintaining a long-term leadership position has proven to be difficult. Those facts form a somewhat compelling case against owning EV stocks, especially for risk-averse investors, but there are two sides to every debate.
The EV industry has already created tremendous wealth for some shareholders. For instance, Tesla (TSLA -1.54%) stock is up 4,500% over the last decade, meaning an initial investment of $25,000 in 2013 would be worth $1.1 million today. More importantly, the market is still early in its adoption of EVs, and very early in its adoption of autonomous vehicles, but experts expect both industries to grow quickly in the coming years.
According to Precedence Research, the EV market will increase at 23% annually to reach $1.7 trillion by 2032, and the autonomous vehicle market will increase at 39% annually to reach $1.8 trillion by 2030. That growth will undoubtedly create wealth for some investors, but identifying the long-term winners in either market could be challenging.
Ultimately, there is no right or wrong answer regarding EV stock ownership, but there are good and bad strategies. Investors that buy EV stocks should do so in the context of a diversified portfolio, and they should understand the risks Buffett pointed out.
Tesla is one of the riskier stocks in my portfolio. Shares currently trade at 6.9 times sales and 103 times free cash flow. Those valuation metrics are outrageous compared to automakers like Ford and General Motors. Yet, I have no plans to sell my stake in Tesla, and I believe the stock will grow severalfold in value over the next decade or two.
Here's my investment thesis: Tesla is the market leader in battery electric vehicles, and I believe its capacity for innovation will keep it ahead of its peers for years to come. That doesn't mean Tesla will maintain its current market share. The company will almost certainly continue to lose market share in the coming years. But the EV market is big enough for several winners, and I believe Tesla will outpace its peers in terms of profitability.
Why? Tesla can produce battery packs (the most expensive part of an EV) at a lower cost per kilowatt-hour than any rival, and analysts at Cairn Energy Research Advisors expect that advantage to persist through the end of the decade. More broadly, CEO Elon Musk says Tesla possesses the most advanced manufacturing technology in the world. That is somewhat subjective, but Tesla did report the highest operating margin among volume carmakers last year, and management believes the company will retain that title in future years.
Additionally, Tesla is a frontrunner in the race to build a fully autonomous vehicle. Data is the cornerstone of AI, and Tesla has far more autopilot-enable cars on the road than its peers, meaning it has more training data for its full self-driving (FSD) software. Tesla cars also pack the most efficient inference computer in the world, according to Musk. Those assets should come to bear in the near future. Tesla recently made its FSD software generally available across North America, and it plans to mass produce a robotaxi in 2024. Ultimately, higher margins on FSD software and autonomous ride-hailing services could make Tesla even more profitable.
Admittedly, the portion of my investment thesis related to autonomous vehicles is very theoretical, and I know some investors disagree with my conclusion on Tesla. But I have a diversified portfolio and a long time horizon, so I am comfortable owning the stock despite the risk.
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