It’s been a crazy year for Elon Musk and Tesla. This year has seen Tesla’s market cap and stock price surge dramatically, to say the least. At the start of 2020, Tesla’s stock price was sitting just under $85 a share. At this time of writing, the stock is closing in on $600 per share; that’s a 600% return in less than one year!
Additionally, it was recently announced that Tesla would join the S&P 500 index, making the stock more likely to be bought amongst millions of index investors. Since the S&P 500 is a weighted index, Tesla will become quite a large holding for most investors.
So why is this happening? Why has Tesla grown so exponentially over the past year? Have they been growing revenue, earnings, equity, and free cash flow for their shareholders?
To the chagrin of many value investors, the answer is yes. 2020 was the first year that Tesla reported positive earnings, which caused investors to shoot the stock price to the moon. This news, combined with FOMO, and a more eco-friendly President-elect, is causing massive surges to the company’s valuation.
Due to the astronomical price appreciation of its shares, Tesla’s market cap has pushed past the $550 billion mark. This move officially makes Tesla the seventh largest company on the stock market. It’s hard to believe, but Tesla is now larger than Warren Buffett’s Berkshire Hathaway!
Here is the question investors really need to be asking themselves: Is Tesla actually worth more than Berkshire Hathaway as a company? Has the business itself grown over 600% in under a year? I would argue that Tesla has a lot more room to grow than Berkshire, but the latter offers even more value to shareholders.
Here are three reasons why I think Berkshire Hathaway is still more valuable than Tesla.
Diversification and Strength
Tesla is a large company that employs over 50,00 people and has been in operation since 2003. They have a very noble goal of changing the way the world uses their electric power, and strives to make electric cars, roofs, and batteries far more efficient to use for the everyday driver/homeowner.
As of now, The business is a two front approach: electric vehicles and solar energy. Tesla currently manufactures four different car models, a few trucks, solar roof tiles, and batteries for those tiles. While the EV and solar energy market are certainly a growing market, it is contained to one specific industry.
Furthermore, in order to function, Tesla relies heavily on subsidies from the US government. To dive into the complexities of laws and regulations of government subsidies is beyond the scope of this article, but it’s safe to say that Tesla would have a hard time keeping the doors open without this support from taxpayers.
When compared to Berkshire Hathaway, Tesla business diversity and strength pales in comparison.
Berkshire Hathaway is one of the largest companies in the world and operates as a conglomerate. They act as holding company for a diverse array of businesses that operate in different sectors and industries. Here are just a few examples of Berkshire’s most well known wholly owned subsidiaries:
Dairy Queen (Consumer)
Berkshire Hathaway Energy (Utilities)
Clayton Homes (Construction)
Fruit of the Loom (Consumer)
Burlington Northern Santa Fe (Railroad)
These companies are just a few examples of the different businesses that Berkshire Hathaway owns in different sectors and industries. You can browse the complete breakdown of Berkshire Hathaway here.
Many of these businesses have been operating longer than Tesla has been in business, and will likely continue to operate for generations to come. Most of these companies don’t require government subsidies to operate either.
Berkshire Hathaway currently sits on over $829 billion in assets vs Tesla’s $45 billion; that’s 18 times more!
Let’s take a closer look at the cash position. Berkshire Hathaway currently holds $145 billion in cash, or 17% of their total assets. This dwarfs the amount that Tesla currently holds, which is $14.5 billion, or 31% of their total assets.
Berkshire Hathaway could outright buy Tesla’s entire asset base only with its cash on hand. Even if it bought all of Tesla’s total assets today, Berkshire would still have $100 billion left to spare in liquid cash!
This is actually where the companies are most similar. Both companies have rockstar billionaires as CEO: Warren Buffett and Elon Musk. Most people think that Musk and Warren are polar opposites, actually more alike than you might think.
While Elon Musk has not officially been the CEO throughout Tesla’s entire existence, he is the co-founder of the company and has been leading it since 2008. The business is unquestionably tied to his cult of personality and passionate beliefs of the future of energy consumption. You can see for yourself the correlation between Tesla’s stock price and Elon’s tweets.
However, that’s really where the comparison ends. The rest of the management for Tesla has rotated like a revolving door over the years. Other than Elon, his brother Kimbal, and a few outliers, most of the management team has only been on board for the past couple of years.
Additionally, Tesla seems to be overpaying their executives. The current CFO is being compensated over $21 million, which is far above the average. They have also been diluting shareholders by issuing more shares every year.
When discussing Berkshire Hathaway’s management team, shareholders can rest assured that they are well taken care of. Warren Buffett bought Berkshire Hathaway in 1965, and has been CEO ever since. His right-hand man, Charlie Munger, has been vice-chairman since 1978. Both of these individuals have been with the company for decades and are synonymous with the business.
The younger managers, Ajit Jain and Greg Abel, have also been with the company for quite a while. Jain has been on board since 1985, while Abel has joined in 2000, but has worked his way up through Berkshire since 1992.
Over the past 20 years, this management team has grown the business tremendously. Since 2000, Berkshire’s stock price has appreciated over 360%, or 18% annually, and equity per share has compounded over 550%, or 27% annually.
Berkshire’s executives haven’t been able to do this just by chance. The team followed the principles Buffett had set decades ago: buying wonderful businesses at affordable prices.
To be clear, I don’t think Tesla is a sham of a business. I hope they can reach all the goals that they set for themselves; just not at the expense of shareholders.
As an investor that wants to compound my money over the long term, I need a strong and diverse business with great managers to do it. Berkshire offers all of these things, and at an attractive price!