Is Elon Musk the Reason Warren Buffett Sold Stock?

Is Elon Musk the Reason Warren Buffett Sold Stock?

Elon Musk and Warren Buffett

  • Berkshire Hathaway sold nearly half of its stake in GM this spring.
  • Tesla has been waging a price war in the electric vehicle industry, and it could intensify.
  • GM’s stock looks dirt cheap, and its profits have been strong, but the quarterly results it’s due to release on Tuesday will provide a key update.

Berkshire Hathaway’s chief has no interest in competing with Tesla’s boss.

However, the two have dramatically different approaches to business. Buffett favors timeless business models and companies with wide economic moats. He loves the insurance industry. For example, Berkshire owns GEICO and a number of other insurance companies, and he favors big-brand stocks like Apple and Coca-Cola.

Elon Musk, on the other hand, sees innovation as the major point of differentiation in business, and is a big-thinking visionary with dreams of colonizing Mars and embedding microchips in people’s brains. Musk even took a swipe at the concept of economic moats once, saying back in 2018, “Moats are lame.”

“If your only defense against invading armies is a moat,” he elaborated, “you will not last long. What matters is the pace of innovation — that is the fundamental determinant of competitiveness.”

These two captains of industry have traded barbs in the media over the years, but seemed to have developed a mutual respect, as Buffett praised Musk at Berkshire’s shareholder meeting earlier this year.

One comment, in particular, stands out, and could inform Berkshire’s trading activity. “We don’t want to compete with Elon in a lot of things,” Buffett said, a reference to Musk’s dedication to innovation and his ability to sometimes do what had previously appeared impossible.

Perhaps, it was not a coincidence then that Berkshire sold 45% of its stake in General Motors (GM 1.12%) in the second quarter, the same period when Buffett made the remarks about not wanting to compete with Tesla. The electric vehicle (EV) leader’s most recent report could give more credence to that theory.

Tesla’s price war

Tesla has lowered prices on its vehicles several times over the past year as Musk seems focused on gaining market share and winning the EV market by being the lowest-cost provider.

On last week’s earnings call, Musk emphasized how crucial it was for the company to be competitive on price, blaming interest rates in part for putting pressure on car buyers and saying that was partly why it lowered prices. Management also said it was focused on “growing volumes in a very cost-efficient manner.”

Musk argued that car buyers are highly price-sensitive, saying that no one would buy a Toyota RAV4 if the compact SUV cost the same as a Tesla.

Earlier this year, the Tesla chief argued that his company could sell its cars at cost and make profits on the software and services it sells the owners, such as full self-driving capabilities. That vision might seem farfetched, but the company’s operating margin has significantly eroded this year, which seems at least partly by choice as it has aggressively lowered prices.

What all this means for GM stock

It’s unclear if Musk’s tactics are the reason Berkshire Hathaway sold nearly half its stake in GM this spring. The conglomerate has owned GM shares for more than a decade, and the stock has been a consistent laggard, which could also be the explanation.

However, GM stock is now dirt cheap despite the company’s solid execution, sizable profit margins, and emerging strength in electric vehicles and autonomous vehicles through its Cruise subsidiary.

Competition from Tesla might be one reason why General Motors is trading at a price-to-earnings ratio of just 4, with its share price hovering above a 52-week low. The United Auto Workers strike is likely weighing on its valuation as well.

Musk may be a fierce competitor, but there isn’t much evidence that Tesla is having a direct impact on the results of automakers like GM. In its second quarter, GM raised its full-year net income guidance to a range of $9.7 billion to $10.3 billion, and reported a 28% jump in adjusted earnings per share, in part related to the fact that it was lapping a prior-year period when its production was hindered by chip shortages.

In the third quarter, vehicle deliveries in the U.S. rose 21% to 674,336; we’ll get the dollar figures in the full earnings report on Tuesday morning. Investors should be on the lookout for any signs in that report that the EV price war is having an impact on GM. In mid-November, when its 13F comes out, we’ll learn if Berkshire has dumped any more of its GM stake.

For now, the stock looks like a steal at a dirt cheap price-to-earnings ratio of 4, even with the disruptions from the UAW strike.

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