- Berkshire Hathaway’s IBM and Apple investments could mean that Buffett’s aversion to technology names is a thing of the past.
- Facebook’s strong financial position and return on invested capital profiles suggest a solid competitive advantage.
- Buffett is constantly looking for “elephant-size” investments and Facebook’s market capitalization fits this criteria.
In the past, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO Warren Buffett had said that he would not buy technology companies. This is mainly due to the fact that there is no real competitive advantage in the technology space, reflective of the dynamic landscape. An upcoming technology start-up could produce substantial gains and would later taper off due to a certain disruptive technology that the company did not anticipate.
Mr. Buffett prefers a traditional brick and mortar company that has a solid track record in profit generation, including consumer stalwarts such as Coca Cola (NYSE:KO) and P&G (NYSE:PG), retail names such as Walmart (NYSE:WMT) as well as famous financial services such as American Express (NYSE:AXP) and the General Electric Company (NYSE:GE). Additionally, these names are within his “circle of competence” giving him the confidence to hold these stocks for a very long time. His technology phobia could stem from his inability to predict the future of the technology landscape.
Recently, Mr. Buffett has started to purchase shares of International Business Machines (NYSE:IBM) after following the company for more than 50 years, implying that he has further expanded his knowledge and insights into the technology industry. Also, one of his investment lieutenants, Todd Combs or Ted Weschler has recently purchased Apple (NSDQ:AAPL) stock. Given that Mr. Buffett has delegated majority of the investment decisions, it would not be a surprise if these investment managers would be willing to consider Facebook stock as part of their investment portfolio.
How Facebook Stacks Up Against IBM and Apple
Despite being a relatively new company compared to other technology names, Facebook has built a durable competitive advantage over a short period of time. In fact, its network effect and brand equity have warded off competitors such as Google Plus and Myspace.
Table 1: Comparative FY 2015 Financial Highlights
|In US$ MM||Apple||IBM|
|Net Profit Margins||20.6%||22.9%||16.4%|
|Return on Invested Capital (%)||22.86%||31.32%||25.43%|
|Debt to Equity (x)||0.01x||0.45x||2.52x|
As shown in the above table, it seems that Facebook could easily match Apple and IBM in terms of profitability and returns. These double-digit returns on invested capital imply that these companies have entrenched solid competitive advantage that could potentially lead to higher share prices in the future.
Facebook's strong balance sheet compared to its peers should attract Berkshire Hathaway. Facebook has virtually no debt with sizable cash reserves, which are channeled to investment opportunities such as Instagram and WhatsApp; hence, further solidifying its lead in the social media space.
It should also be noted that Mr. Buffett loved traditional media companies due to the reader’s affinity towards the product. Similarly, people around the world are constantly checking on their Facebook app for recent news and events, creating an advertising platform, which can be likened to the traditional media companies.
Mr. Buffett is constantly looking for an investment that moves the needle given the massive size of his investment portfolio. In a roaring bull market, he usually stays in cash, unless he finds an investment opportunity difficult to refuse.
Facebook fits the criteria in terms of size. Its current market cap of around $366 billion has exceeded Berkshire Hathaway’s own market cap. It seems that the only obstacle why Mr. Buffett or his lieutenants would not buy Facebook shares is its valuation. It is currently priced at 61 times earnings, much higher than its industry valuation and S&P 500 average. It appears that it might take a while before Facebook will appear on the quarterly SEC filings of Berkshire Hathaway based on lofty valuations alone, notwithstanding the fact that Mr. Buffett has relaxed his stringent traditional P/E metrics while making an investment. However, all the investment criteria point to a future investment in Facebook stock by Berkshire Hathaway.
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