Berkshire in Techland

Warren Buffett and Charlie Munger have studiously avoided the IPO game for almost six full decades now. Here are some quotes from Buffett that should give you some idea of his take on these types of investments:

“You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day…”

and

“If they want to do mathematically unsound things and one person gets lucky… it’s nothing to worry about,” Buffett said. “You don’t want to get into a stupid game just because it’s available.”

These statements would definitely not help his popularity on the Wall Street Bets subreddit in this day and age.

But Berkshire Hathaway did make a pre-IPO investment in Snowflake, which went public today as the largest software IPO of all time. The Berkshire stake is now worth considerably more than the shares they purchased directly from the company and from a selling shareholder.

Berkshire Hathaway (I am personally long the B shares) now has a market value of $500 billion and change. Approximately half of that is comprised of Apple stock and cash. Under the stewardship of the two younger stockpickers Warren Buffett brought on, the portfolio has begun to slowly tilt toward technology, with investments in Mastercard, Visa and even Amazon being credited to the proteges who will likely someday take over the entire portfolio.

As a thought exercise, what if Berkshire Hathaway began to seriously flex its financial muscles throughout Silicon Valley and start getting more heavily involved in large secular trends like data, AI, machine learning, cloud computing, data centers, ecommerce, logistics and fulfillment? Buffett has personally expressed a lack of interest in betting on innovation for decades, but he’s 90 and has come to rely more and more on his investment committee in public market investments these days. He has also probably come around to the idea that there are areas within technology that are more than just bets on innovation – areas that allow him to be invested in the type of big moat, high cash flow-generating companies that have been the hallmark of his approach since the 1980’s.

Besides, even if Buffett is not besotted with the modern push toward digitization and technology spending, he’ll still be benefitting from it either way. Apple is paying Berkshire approximately $800 million per year in dividends! In the first quarter of this year, Berkshire filed a 13F indicating a new 19 million share position in Kroger and is now one of the massive supermarket chain’s top ten investors. Kroger is working with British robotics pioneer Ocado to completely transform the way the company handles online orders at its fulfillment centers. If Kroger’s work in this area pays off to the degree it has for Target and other retailing giants, Berkshire will be in on the ensuing profits.

If Berkshire were to continue its expansion into some of these types of investment activities, it’s hard for me to picture the multiple not expanding in concert. This type of thing is called a re-rating, and re-ratings happen all the time on Wall Street. Especially when a formerly moribund company (this is basically insurance conglomerate with a railroad and some utilities bolted on) starts to demonstrate an appetite for high profile growth. We saw Apple’s re-rating produce explosive gains for the company’s multiple (and market cap) in recent years, and Walmart is another good example of this.

No one should expect Berkshire to turn into a tech incubator or a venture capital firm overnight. Buffett is probably not looking to create the Omaha version of Softbank LOL. But 1.3x book value for a company with this much opportunity and flexibility in front of it seems to be too pessimistic.

I talked about this on CNBC earlier today. It’s something that I think is worth watching and considering.