Guest Blog Post: Galileo Russell is a 24 year-old Tesla shareholder based in NYC. He has been blogging about Tesla since 2012, and is the founder of HyperChange TV, a new YouTube channel about tech and finance news for millennials.
Warren Buffett’s empire may have a lot to lose if Tesla executes on its vision of revolutionizing both energy and transport. During Berkshire Hathaway’s 2017 Shareholder Meeting, Warren Buffett plainly acknowledges the threat that both self-driving cars and trucks will have on several of his business lines. This got me thinking, how much of Berkshire’s revenue is at risk if Musk is able to execute Tesla’s latest Master Plan?
Above: Warren Buffett and Elon Musk both on the cover of Fortune (Source: Fortune)
It’s no secret that GEICO’s main business is auto insurance. This is an industry that’s ripe for disruption, as cars will become magnitudes safer thanks to autonomous technology. Premiums will drop “significantly” according to Buffett, if self-driving cars become pervasive. And if Elon Musk has it his way, this is an inevitability. GEICO represented $25.5B or 11.4% of Berkshire’s 2016 revenue.
Burlington Northern (BNSF), Warren Buffett’s railroad, is setting up to compete head on for cargo shipments with Tesla’s Semi. The efficiency gains by self-driving trucks will drive cargo shipment prices lower. On top of that, the bulk of Burlington’s cargo is mainly natural gas, oil and coal. Demand for all three of these commodities is tied to an energy system that still relies on utilities, a divergence from Tesla’s vision of a decentralized grid (via batteries and solar roofs). Burlington was $19.8B or 8.9% of Berkshire’s 2016 revenue.
Above: Teaser image for Tesla's new semi truck (Image: Electrek)
Speaking of utilities, Berkshire Hathaway Energy another one of Buffett’s subsidiaries, produces about 30 megawatts of power annually. Although ⅓ of this is related to solar and other renewables (wind, geothermal and nuclear), the remaining ⅔ are natural gas and coal. Up until this point, his utilities have been operating as virtual monopolies, with no local competition. As Tesla quickly equips its growing store network with Powerwalls and solar roofs, its vision for a distributed energy system will begin competing for customers. Berkshire Hathaway Energy posted $17.9B or 8% of Berkshire’s in 2016 revenue.
Meanwhile... McLane, a supply chain services company that Buffett acquired from Walmart in 2003, operates a network of more than 3,700 tractor-trailer trucks, delivering groceries and consumer staples across the US. This logistics business will have to adapt to the advent of self-driving trucks, and will inevitably become of a customer of Tesla (purchasing its Semi) or compete with someone who is. McLane comprised $48.1B or 21.5% of Berkshire’s 2016 revenue.
Above: Buffet's semi truck company, McLane (Source: Mclane)
In total, these four businesses lines represent nearly 50% of Berkshire’s 2016 revenue. Based on the trajectory of Tesla and the company’s ambitious growth plans, it looks like a very large chunk of Buffett’s business is becoming less relevant by the day.
These are just a few examples of how Buffett stands to compete with Musk in the next decade. If one digs deeper, there are even more businesses that Berkshire owns, such as freight car leasing, and franchised auto dealerships, that will decline as Tesla’s vision is realized. To hedge against this risk, I believe Warren Buffett should take a position in Tesla. Whether it’s today, or in the midst of our next recession, Buffett needs to develop a strategy to start acquiring shares.
Above: Tesla is challenging the franchise dealership model (Image: erpec news live)
Elon Musk is perhaps the greatest innovator of our era, and at 45, his best days lie ahead. The combination of Musk's vision and Buffett’s capital, would make an unparalleled duo. Much of the risk in Tesla is simply that the company requires billions of upfront CAPEX to scale its production capacity. These cash flow needs will dwarf the company’s profits for the next 3-4 years as production scales more than 10X from under 100,000 units per year, to 1M+ beyond 2020. Buffett’s fiscal support could serve to both accelerate Tesla’s production timeline, and de-risk the balance sheet. Less than 10% of Berkshire’s $49B cash pile would be plenty to make it all happen.
Although Tesla’s stretched balance sheet, history of operating losses and no near term plans for profit seem to entirely contradict Buffett’s typical investing approach, we think an exception could be made. Buffett and Munger frequently cite mistakes of omission as their greatest blunders. During the 2017 Shareholders Meeting both sung the praises of Jeff Bezos and the Alphabet founders. In 10 years I worry they will be saying the same thing about Musk, as Tesla executes on its long-term mission of electrifying both the energy and transportation industries.
Above: Author explains his rationale for why Warren Buffett should consider buying into Tesla (Youtube: HyperChange TV)
Tesla will be Berkshire’s biggest mistake of omission ever. Not only because Buffett will be missing out on the creation of the greatest American brand of the 21st century (my guess), but because Tesla is on its way to competing with nearly half of Berkshire’s business.
This article (and video) are purely the author's opinion and should not be regarded as factual information. Author is not a financial advisor. This is not a recommendation to buy or sell securities. Do not assume any facts and numbers in this video are accurate. Always do your own due diligence. As of 5/17/2017 HyperChange host (Galileo Russell) is invested in shares of Tesla [NASDAQ: TSLA].