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Could Facebook Be Berkshire's Next Tech Buy?

Could Facebook Be Berkshire's Next Tech Buy? - Facebook, Inc. NASDAQ:FB, Berkshire Hathaway Inc. NYSE:BRK-B

In a note to investors last week, Wedbush analysts paid Facebook Inc FB 0.32% the compliment of saying it “has a virtually insurmountable competitive advantage,” which may have gotten some investors thinking of where they’ve heard that term before.

Moats

Competitive advantage is one of the pillars of Investor Extraordinaire Warren Buffett’s stock picking strategy. He often refers to them as “moats” that protect the corporate castle from competitors seeking to reduce its earnings power. Wedbush highlighted Facebook’s more than 1 billion daily active users and its ability to convince 3 million advertisers that those users can be leveraged successfully into ad revenue.

Buffett's Aversion To Tech

What is striking about considering Facebook in this context is that Buffett himself has traditionally shied away from tech companies. His rationale has to do with one term from his oft-cited comments on competitive advantage that’s missing from the Wedbush description of Facebook: durability.

Buffett searches for durable competitive advantage, and in the tech space, he typically feels the requisite need for change, progress, development and so forth makes it too hard to forecast the durability of a tech-centric good or service, let alone the specific company that will dominate in delivering it.

To paraphrase what Buffett often says of one of his favorite holdings, The Coca-Cola Co KO 1.01%, the introduction of the Internet, smartphones or self-driving cars has had little effect on whether or not people drink Coke.

The Apple Event

So, it’s little wonder that the market reacted with astonishment when Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) reported having purchased almost 10 million shares of Apple Inc AAPL 0.55% through March 14 of this year. It was later understood that one of Buffett's two lieutenants at Berkshire had made the purchase, not Buffett himself. Still, it opened the door to speculation that the man they call the Oracle of Omaha had softened just a smidge on his company making investments in technology.

Related Link: Axiom's Anthony Highlights 5 Key Concerns Facebook Investors Might Be Considering

Facebook In Focus

Circling back to Facebook: If the moratorium on tech giants has been lifted at Berkshire, what besides its giant user base might attract the attention of the Buffett gang?

  • Network And Brand Identity: There’s a reason that Google Plus and MySpace didn’t work out, at least not relative to Facebook’s success. It also makes smart acquisitions like Instagram and WhatsApp.
  • Debt Position Is Favorable: Facebook doesn’t do debt, leaving it with plenty of options operationally and keeping pressure off its margins.
  • PEG Ratio Below 1: This indicates that even at its present valuation, the market is undervaluing its projected earnings growth.

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DateFirmActionFromTo
Jul 2016BTIG ResearchDowngradesBuyNeutral
Jun 2016
Apr 2016AxiomMaintainsBuy

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