Though you probably don't need the reminder, it's been a brutally bad year on Wall Street. All three major U.S. stock indexes fell into respective bear markets, with peak-to-trough declines in excess of 20%. Meanwhile, the bond market is on pace for its worst year in history.
But you won't find any sulking from Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) CEO Warren Buffett. The Oracle of Omaha understands that big declines in the broader market are a red-carpet opportunity to buy high-quality businesses at a discount. Buffett and his team have put tens of billions of dollars to work this year buying 19 separate stocks.
The $64,000 question is: What stock might be next on Warren Buffett's buy list?
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
With shares of electric vehicle (EV) manufacturer Tesla (TSLA 4.96%) roughly 70% below their all-time high set late last year, could it be the next Buffett buy?
Before answering that question, let's look at the four factors that could put Tesla on the Oracle of Omaha's radar.
Here's what could, in theory, put Tesla on Warren Buffett's radar in 2023
First, it's an industry leader -- and I'm not just talking about its market cap, which surpasses all other auto stocks. During the third quarter, Tesla accounted for a 65% share of EVs registered in the United States, according to S&P Global Mobility, a division of S&P Global. Buffett is a strong believer that industry leaders tend to keep winning as long as they have a sustainable moat.
Secondly, Tesla can sustain its industry-leading share by significantly boosting production to meet growing demand for EVs. Earlier this year, the Austin, Texas, and Berlin, Germany, gigafactories came online. Although supply chain issues could disrupt production in 2023, it's feasible we could see Tesla surpass 1.5 million EVs produced next year after pacing more than 1 million EV deliveries in 2022.
The third beacon for Warren Buffett and his investment team would be the company's income statements. Tesla has been profitable on the basis of generally accepted accounting principles (GAAP) in each of the past three years. Over the trailing five quarters, GAAP net income has ranged from $1.62 billion to $3.32 billion. Even though regulatory credits are aiding Tesla's profits, these emission credits are no longer necessary to achieve profitability.
The fourth and final factor that could draw the Oracle of Omaha's attention is Tesla's balance sheet, which ended September with $21.1 billion in cash, cash equivalents, and marketable securities. CEO Elon Musk has suggested that Tesla's board of directors would consider a share buyback once the U.S. and global economic outlook stabilizes a bit.
Is Tesla a Warren Buffett stock?
But are these four factors enough to coerce the Oracle of Omaha to put Berkshire Hathaway's money to work in Tesla? In my view, not a chance -- and there are two key reasons why.
1. Tesla lacks a true moat
To begin with, Tesla's competitive advantages aren't as rock-solid as its market share entails. The company's U.S. and global market share have been shrinking as global automakers aggressively spend on EV, autonomous vehicle (AV) research, and battery production.
In the U.S., General Motors (GM 1.20%) -- a current Berkshire Hathaway holding -- and Ford Motor Company (F 0.69%) have earmarked $35 billion and $50 billion, respectively, for EV, AV, and battery research. By the end of 2025, GM and Ford are each expected to have unveiled 30 new EV models worldwide.
To add to this point, even though Tesla is the most popular EV sold in North America, it lacks the brand history and awareness that stalwarts like General Motors and Ford bring to the table. Building vehicles for American workers for more than a century is an intangible advantage that market cap simply doesn't trounce.
Furthermore, Tesla's competitive edges are already being toppled by newer entrants in the EV space. For instance, China-based Nio brought two sedans (the ET7 and ET5) to market this year that offer 621 miles of range with the top-tier battery pack upgrade. That literally and metaphorically runs circles around the range offered by Tesla's flagship Model 3 sedan.
Without a clear-cut moat, Tesla wouldn't make the grade with Warren Buffett and his investment team.
Production of the Tesla Cybertruck has been delayed. Image source: Tesla.
2. Elon Musk doesn't evoke trust from shareholders
The other reason I believe there's absolutely no chance the Oracle of Omaha or his investing lieutenants (Todd Combs and Ted Weschler) would purchase shares of Tesla in 2023 is CEO Elon Musk.
For Buffett, strong management teams are a luxury, not a necessity, as long as the business he's investing in is sound. However, if that management team threatens consumer and shareholder trust or could adversely impact its operating performance, it's a big red flag.
Over the past few years, it's become readily apparent that Musk is a legal, financial, and operating liability for Tesla. Yes, he's an innovator who has helped build Tesla from an upstart into the world's most valuable auto company. But he's also drawn the ire of U.S. regulators on more than one occasion, and has made a habit of overpromising and underdelivering when it comes to new innovations and products.
As an example, Musk has been proclaiming that level 5 full self-driving vehicles are a year away for the past eight years (and counting). He also expected 1 million robotaxis to be on the road a couple of years ago (the current robotaxi count is zero). There's also the Tesla Semi and Cybertruck, which were delayed for years.
The point is, Musk is too much of a wild card to be trusted in a leadership role. For that reason, Warren Buffett and his investment probably wouldn't touch Tesla stock.
