Warren Buffett, Tesla Stock, and a Gas Station: Here's the Connection

Berkshire Hathaway (BRK.B), which is led by the legendary value investor Warren Buffett, has been gradually selling its shares of Chinese electric vehicle (EV) giant BYD (BYDDY), and has also trimmed its stake in General Motors (GM) over the last year.

The EV industry is going through turmoil, to say the least, and faces several headwinds - including the brutal price war. As the “Oracle of Omaha” backs down on EV stocks, should investors also follow suit? We’ll take a closer look in this article.

Many EV Stocks Have Fallen to Record Lows

Once a fast-growing space that attracted immense interest from investors, the EV industry is now looking like a different ballgame entirely. Many startup EV companies - including Fisker (FSR), Lucid Motors (LCID), Polestar (PSNY), and Canoo (GOEV) - are trading near their all-time lows. Rather than on track to become the “next Tesla,” as some of these companies were once touted, they are now fighting for relevance - or worse, trying to fend off bankruptcy.

What’s Wrong with the EV Industry?

The most recent trigger for the collapse in EV stocks is concerns over demand after Fisker, Polestar, and Lucid Motors all slashed their production guidance. Rivian (RIVN) is a notable exception here, as the company marginally raised its 2023 production guidance to 54,000 vehicles.

Concerns over EV demand - especially amid the massive production capacity planned by legacy automakers, as well as pure-play EV names - have been around for quite some time now, and both Ford (F) and General Motors have also toned down their aggressive EV expansion plans.

The price war, which was initiated by Tesla (TSLA), is also working to the detriment of EV companies. Lucid Motors, NIO (NIO), Ford, and Xpeng Motors (XPEV) are among the companies that had to lower car prices after Tesla slashed prices for its models. The price war has now pressured Tesla’s profits, also - and the Elon Musk-run company’s operating margins dipped below 8% in Q3 2023.

Tesla, meanwhile, is optimistic that it can survive even by selling cars at zero profits, and later make up the difference through sales of autonomous technology. Musk, along with some other high-profile Tesla bulls, believes that autonomous driving accounts for the bulk of Tesla’s valuation. 

Notably, Tesla also has the luxury of carrying $26 billion in cash and cash equivalents on its balance sheet – and despite ongoing investments in expanding capacity, it generated free cash flows of $2.3 billion in the first nine months of 2023. However, things look comparatively bleak for many other startup EV companies. Funding has dried up for many of these names amid higher interest rates and the rising tide of general pessimism towards the industry. 

What’s Warren Buffett’s Take on the EV Industry?

While Buffett hasn’t spoken directly about the EV industry, we can draw a useful analogy from his views on the streaming industry - which hosted a price war of its own long before the EV industry. 

Speaking at this year’s annual shareholder day, Buffett said that streaming companies would need to raise prices to survive. He added, “You’ve got a bunch of companies that don’t want to quit. And who knows what pricing does under that. But anybody who tells you that they know what pricing will do in the future is kidding themselves.”

The legendary investor also drew parallels with a “price war” at his own local gasoline station when he was in his early 20s. According to Buffett, there was a larger competitor a few miles away, and the two stations benchmarked their prices to each other’s. 

Buffett explained, “He determined our profit, because we looked at his price every day. And if we cut the price, he’d match it, and we couldn’t raise the price. And he did twice the gallonage, so he won.” 

Tesla Is the “Bigger Gas Station” in Buffett’s Example

To me, Tesla is the “bigger gas station” in Buffett’s example, and a live example of how a price war by a big company can squeeze out smaller players. The EV giant still maintains some of the best margins in the automotive industry, despite the price cuts - while many smaller EV players risk going out of business, and even established legacy automakers are feeling the pain in their EV segments.

The Near-Term Outlook for EV Stocks Looks Hazy

The EV industry is going through the kind of upheaval that we last saw over a century ago in the automotive industry, where only a small handful of players survived while thousands of others went out of business. 

Fast forward to 2023, and while we fortunately don’t have thousands of companies trying to lead the transition from internal combustion engines to EVs, it is still a sizeable number. It would be fair to expect the number of EV players to fall by the end of this decade; while some companies might go out of business, others might merge - either among themselves, or with the larger players to survive.

As for investors, those who are risk-averse should stay away from EV stocks for now as the turmoil looks far from over. Also, it would be prudent to avoid companies that have questionable product propositions and weak balance sheets. 

The sector does hold long-term promise, though, and the transition from ICEs to EVs will continue, even as it might be relatively difficult to pick the winners in the race at this point. Watch out for the players that have a compelling product, strong balance sheets, backing from investors with deep pockets, and efficient management to tide over the current crisis.