Here’s Why Buffett Won’t Buy Facebook

Warren Buffett is a man who owns many businesses. But based on his own words, it’s not likely that he will ever own Twitter or Facebook. In a few weeks, we will have access to the latest report that tells us which stocks Berkshire Hathaway has been selling and buying throughout the quarter. But there’s one thing that we feel certain about. Twitter and Facebook are not likely to be on the list of purchases. Buffett might not have directly said this in public, but it’s quite simple to realize that the biggest deterrent for both companies would be the valuations. This is especially true since Buffett is of value minded investor. But there are other reasons as well regardless of the price-to-earnings ratio. We don’t feel Buffett would ever by these particular social media stocks. More than Just Revenue Both of these companies have been growing at incredible levels. During the first nine months of 2013, Twitter’s annualized revenue rate grew by 167%. Facebook also saw impressive revenue growth even though the company is already so large. They gained 43% during this time period. But you cannot say the same thing for Twitter’s earnings power, because in truth, the company has shown a net loss of $344 million over 45 months between January 2010 and September 2013. During the first nine months of 2013, the company lost $133.8 million. Prior to the IPO, in its S1 filing, you couldn’t even find a reference to the words “net income”. But on the other hand, the phrase “net loss” was mentioned 106 times.

// ]]>Buffett once mentioned that he operates by two rules. The first rule: “Never lose money and the second rule: “Don’t forget rule number one.” It’s clear that Buffett would never even consider Twitter as an investment. On the other hand, Facebook tells us a different story. If you exclude share-based compensation, the company has done an incredible job growing its income. Although the trailing price-to-earnings ratio stands at 141, the forward ratio is listed at 49, based on the latest Thomson Reuters estimate. Even though that is still quite high, according to Berkshire Hathaway’s September holdings, Buffett and company own $750 million worth of Liberty Media. They currently have a forward P/E ratio of 33, we learned based on the same estimate. Here’s an often repeated Warren Buffett quote, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” so it’s possible that Buffett investing in Facebook is not completely beyond the realm of possibility. But Buffett once gave the reason in one of his letters to shareholders saying exactly why he would never purchase Facebook. Not Trying to Pick the Biggest Winners During a 2001 shareholder letter, Buffett mentions: “At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.” Even though the quote is nearly 12 years old, Buffett wrote this statement right when the technology bubble burst. At the time, the S&P 500 dropped by more than 30% in a two-year period. The NASDAQ dropped about 45% in value. By taking a step backward, this reveals exactly why we see that the social media business is in its infancy even though Facebook controls the social media world. Few people would say that Facebook is unproven at the time, but there was a study in Princeton that says Facebook is going to lose roughly 80% of its entire user base between 2015 and 2017. Obviously, Facebook refutes the claim, and the chief financial officer said it “did see a decrease in daily users specifically among younger teens.” Last weekend, time magazine wrote “More Than 11 Million Young People Have Fled Facebook since 2011.” This clearly shows that Facebook’s business model sees ups and downs, growth and fluctuations, and it may be many years before the best company emerges on top. Let’s not deny the fact that the Facebook business and stock has been on quite a roll over the last few years. But looking at the company as a long-term investment the way that Warren Buffett would, there are many questions that still remain.