Bill Ackman Drives a Tesla: Here's Why He Won't Buy the Stock
Bill Ackman has made it clear: He wants to be the next Warren Buffett. That’s easier said than done, to be sure. But the fund manager in charge of Pershing Square has revamped his investment style since his activist days and runs a concentrated portfolio of long-term, mostly passive holdings.
So, it’s no surprise that Ackman’s investment decisions are rooted in the same investment philosophy as Warren Buffett’s. That said, Ackman has notably invested in one area Buffett historically avoided: technology stocks. Some of Ackman’s largest holdings are the big tech stocks Amazon, Microsoft, and Meta Platforms. When asked why Ackman is interested in those companies but not other members of the “Magnificent Seven,” such as Tesla (NASDAQ: TSLA), Ackman’s response echoed wisdom shared by Buffett over the years.
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Why Ackman won’t buy Tesla stock
Ackman likes Tesla’s products and has a lot of respect for its CEO, Elon Musk. Ackman even said in a recent interview that he drives a Tesla. But Tesla’s stock has become detached from the current product it sells: the car that Ackman, who can purchase any car he likes, has chosen to use.
“To own Tesla at today’s valuation, you have to make some grand assumptions about robotics and other things that they’re going to achieve over time,” Ackman said. “Our portfolio is comprised of businesses where we, with a very high degree of confidence, can predict the cash flows over a very long period of time. I think it’s very hard to do that with Tesla.”
Tesla’s stock currently trades for over 200 times forward earnings estimates. It’s an automaker trading at 15 times sales, while other car companies trade at sales multiples below 1. While its vehicle deliveries are growing about 10% year over year and expected to continue doing so through 2030, that’s far from justifying the enormous multiples on the stock.
Indeed, Tesla is a $1.5 trillion company because investors expect it to earn tremendous profits from developing autonomous vehicles and humanoid robots in the future. The vast majority of bull cases for Tesla, such as Ark Invest’s valuation, stem from its fledgling robotaxi efforts. And now Musk is dedicating a significant amount of Tesla’s manufacturing capacity to its humanoid robot, Optimus, which is a massive bet on labor disruption.
How either effort will play out is very hard to predict. And if Ackman can’t predict it with a high level of confidence, he stays away. It’s that simple. It’s the same philosophy Buffett used.
Tesla could go on to scale both very quickly and very profitably, but it could also fall flat. As Buffett said in his 1996 letter to shareholders, “I would rather be certain of a good result than hopeful of a great one.” And that defines Ackman’s focus when evaluating companies in today’s market.
The companies that Ackman can predict with certainty
While Buffett mostly stayed away from tech companies due to the industry’s rapidly changing landscape, Ackman sees some parts of the sector as far more predictable than others. That’s true even in artificial intelligence, where multiple companies are constantly pushing the boundaries of innovation. In particular, he holds significant stakes in Amazon, Microsoft, and Meta.
The first two companies operate the world’s largest public cloud platforms: Amazon Web Services and Microsoft Azure. Both have seen tremendous demand amid the AI boom, prompting them to spend large sums of capital building out capacity. Both plan to spend around $200 billion on building and outfitting new data centers this year. That spending is weighing on both companies’ free cash flow for the year and their stock prices.
However, that spending comes with a high degree of certainty that the companies will see a good return on investment. Amazon Web Services had a backlog of $364 billion in contracted revenue as of the end of the first quarter, plus it signed a $100 billion deal with Anthropic that’s not included in that amount. Likewise, Microsoft has $627 billion in remaining performance obligations across Azure and its productivity software business. Both should see their cloud revenue accelerate in line with the acceleration in their capital expenditures.
Meanwhile, Meta could be one of the biggest beneficiaries of advances in generative AI thanks to its tremendous scale. Improvements in recommendations, ad creation, and targeting have increased both engagement and ad pricing, resulting in strong revenue growth in the core advertising business. Generative AI also opens new opportunities for business AI chatbots on its messaging apps, which could be a massive revenue stream down the road. Management has also seen strong engagement with its own chatbot, Meta AI, which could be another monetization avenue.
Importantly, all three companies are currently trading at historically low valuations. That means there’s significant room for error in any predictions about future cash flows. And while all three are certainly poised to deliver strong operating results over the long run, their current stock prices discount future earnings more than those of many other AI stocks, including Tesla. That combination of predictability and price is what gives Ackman the confidence to make them significant positions in his portfolio.
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Adam Levy has positions in Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Microsoft, and Tesla. The Motley Fool has a disclosure policy.
Bill Ackman Drives a Tesla: Here’s Why He Won’t Buy the Stock was originally published by The Motley Fool