This might seem like the worst idea that anyone has ever tried to sell to Berkshire. However, this speculation makes a lot more sense than it seems at first glance. Let’s see:
During Berkshire’s annual meeting, Warren Buffet has acknowledged regret by having missed on the Google (GOOGL) and Amazon (AMZN). All his talk about staying within the circle of competence has suddenly vanished. In my opinion, Buffet didn’t miss it, he just remained skeptical about the profound effects that the internet could really have on traditional sectors like retail. And when the effects became clear, it was too late.
In my view, the internet has brought more innovation opportunities than people realize. For instance, it opened the doors to artificial intelligence. Most internet companies like Google and Amazon are now AI companies. Basically, they found a way to leverage their network and server infrastructure constructed for their initial businesses (indexing information and selling books).
Following this line of reasoning, the next step will be automation. The logic is simple, if Amazon wants to make your buying experience seamless, then the way the goods are delivered must be revolutionized, for instance, so you can get same day delivery.
That is just an example of how current innovation (Amazon online shopping) might be pushing further innovation (automated delivery). This might not the be exactly how things will develop, but, nevertheless, we can expect these innovations to spillover to several economic sectors.
Status quo fall down
The current tech wave will have an impact on several other sectors, as the internet had on retail. AI applied to cars will change the way people interact with cars. Ironically, it will also change the ways car are built. Factories will become more and more automated (just like the cars) and advanced manufacturing will be a critical competence in several industries.
Coincidentally, energy sources are already changing towards renewables, with solar being the most promising tech. This means that there are two revolutions developing at once in the auto industry.
In this context, Tesla’s market capitalization has acted as a self-fulfilling prophecy. The idea that Tesla is going to succeed has allowed the company to attract great people that may actually make it succeed.
Why Berkshire and Tesla?
Firstly, Tesla is susceptible to market whims. So far, the stock price appreciation has worked just fine, but there are no guarantees that the future will be as bright. In this context, Berkshire could provide the funds and stability that could increase Tesla’s probability of success. Additionally, Tesla would have the resources to scale as fast as they can. The speculative nature of Tesla’s business would be stripped down.
Secondly, for Berkshire, Tesla could be a bet capable of changing the economic and social landscape for the following years. It also has the potential to be a huge financial success for the Omaha-based conglomerate. It could be Buffet’s boldest and brightest move ever. If successful, it would be capable of compensating for Buffet’s mistakes on Google and Amazon.
Additionally, a possible transaction fits the USD 100 billion of capital that Berkshire needs to employ in some big acquisition in the near future.
Finally, it would be a natural hedge for Berkshire’s insurance, dealership and energy operations. On the other hand, it could offer the resources that Tesla needs to scale big and an asset allocation for Berkshire’s ever growing funds.
Why it won’t work?
It is doubtful that Elon Musk wants to be another Warren Buffet’s employee. He has done very well on his own and he has mastered the intricacies of financial markets. He has been able to keep a constant hype around the company. The stock price has kept appreciating, which means that great human resources have been (and still are) attracted to the company.
Warren Buffet is known to be really conservative when evaluating deals. He likes businesses that have wide competitive moats. In Tesla’s case, the economic moat is unclear and even if exists, it may not be durable. We may be talking about intellectual property and engineering prowess or organizational culture geared towards fast execution and problem solving. Whichever it might be, it doesn’t seem to be the classic moat that Buffet appreciates. Therefore, this won’t likely fit his traditional investment criteria (however, in the past he has come around several times).