“Value is not determined by those who set the price, Value is determined by those who choose to pay it.” – Simone Sinek.
In the first quarter of 2019, Berkshire Hathaway owns 5.5 percent of Apple Inc. (AAPL) worth $36 billion (cost price). It now worths ~ $40 billion. Warren Buffet publicly praises Amazon and Google (Alphabet). Despite his love for those wonderful companies, he has not bought any.
Why? What did he see in Apple which is not in Amazon or Google?
I think the answers is very obvious. The price is not right.
Below is the comparison of the Income Statement of the top Tech companies along with their market capital.
(Overly simplified financial comparison of Tech giants.)
Amazon sells for whooping 81 times its current net income while Google sells at 26 times.
Apple, on the other hand, sells for just 14 times its current net income. When Berkshire bought it, it was selling for 11 times its earnings. In one of the interview, Warren mentioned that Apple is now expensive at 16 times the earnings! So, there is no way Berkshire will pay 81 times the current earning for Amazon. (Full analysis in future posts)
This makes more sense to me than price per earning. Which option would you like?
Option 1 (Amazon) – You give me $800 and I give you $10 per year for 10 years.
Option 2 (Google) – You give me $800 and I give you $31 per year for 10 years.
Option 3 (Apple) – You give me $800 and I give you $60 per year for 10 years.
Obviously, the sane person will pick option 3. However, it is not this simple. There are zillions of variables.
The other deciding factors are:
- What happens with that $800 after the 10th year? Will you get it back? If yes, more or less?
- What happens to the earnings? Will it remain the same or go up or go down?
Yes, there is no doubt Amazon and Google are wonderful companies run by wonderful managers, but there is no margin of safety at current price.
I am a tech optimist. I believe the technology has a ton of values to dispense.
The top 15 most viewed websites (below) are bound to do well unless something unprecedented happens.
If investors can buy them at a fair price with a margin of safety, they are likely to get handsome return.
Disclaimer – Long position on all listed above.
Some Good Reads
- An Investment approach that Works (Farnam Street)
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