By Guest Author Insider Monkey. It’s widely
assumed that Warren Buffett doesn’t invest in technology stocks, but in recent
years, this belief has contrasted with reality. After accounting for zero
percent of his equity portfolio at the end of 2010, the tech sector now makes
up one sixth of Buffett’s stock holdings. At Insider Monkey, we’ve discovered
that hedge funds and other prominent investors’ best stock picks exhibit market-beating potential, so it’s worth paying attention to these
developments.
In the case of
Buffett and Berkshire Hathaway, they're not your typical technology investors. They
follow a very strict set of rules when selecting investments in this space,
which, through our observations, boil down to finding tech companies that: (1) trade
at very cheap multiples, (2) pay a
dividend, and (3) have sustainable product offerings that will safeguard their
survival over the next 15 to 20 years.
With this in mind,
the next logical question in many Buffettologists’ minds is: will the Oracle
buy shares of Twitter [TWTR] once it becomes a publicly traded entity?
This was the same
question many Facebook [FB] enthusiasts asked after its IPO last year and to
no surprise, many mega-investors bought in. Buffett didn’t, however, and it is
evident that Facebook broke all three of the rules described above. The stock traded
at more than 70 times earnings upon going public and there simply wasn’t any
assurance that it wouldn’t go the route of MySpace, Digg, Xanga and the rest of
social media’s fallen giants. It also didn’t offer a dividend, and still
doesn’t to this day.
Twitter faces all
three of the same problems.
According to most estimates,
Twitter will be valued near $11 billion when it goes public, giving it a per
share value between $19 and $20. At this price, the company will theoretically
trade at about 18.3 times this year’s estimated revenue, which most
conservative analysts expect to be around $600 million.
Facebook,
meanwhile, is valued at a price-to-sales multiple near this mark, while
LinkedIn [LNKD] is also in the same vicinity. It’s unreasonable to expect that
Buffett would be attracted to a valuation in this range if he hasn’t been
before.
Equally as
important, we also expect that the billionaire will take issue with Twitter’s
outlook over the next 15 to 20 years. While some may argue that the micro
blogging service can generate more advertising revenue than a Facebook or a
LinkedIn for example, there’s still no guarantee that Twitter will be around in
two decades. Obviously, there’s no such thing as 100% certainty in any
industry, but there are fewer risks facing Buffett’s favorite investments, like
Wells Fargo [WFC] and Coca Cola [KO], than there are to any social media company.
Putting the final nail
in the proverbial coffin, we also know that from Twitter’s S-1 filing, it has no plans to declare dividends “in the
foreseeable future.”
So, if Warren Buffett
won’t buy Twitter, what stock is responsible for the majority of his investment
in the tech sector?
As reported in his
latest 13F filing, the answer is IBM [IBM]. Buffett and Berkshire
hold almost 15% of their $89 billion equity portfolio in the information
technology giant, and it meets all three of our aforementioned criteria. IBM
trades at a mere 9.9 times forward earnings, has five diversified business
segments from IT infrastructure to software, and it pays a dividend yield above
2%.