Why Warren Buffett Would Never Buy Facebook

Warren Buffett owns a lot of businesses, but his own words show that Facebook or Twitter will likely never be among them.

Jan 27, 2014 at 7:25AM

We are just weeks away from the latest report of what stocks Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has been buying and selling -- and one thing is certain: Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) will not be on his list.

Source Coca Cola

Source: Coca-Cola.

While Buffett may have not come out and said this directly, it is easy to believe the valuations of the two companies would be the main deterrent for the value-minded mega investor. But there are a number of reasons apart from a simple glance at price-to-earnings ratios that prove why he would never buy those social media stocks.

Beyond revenue
The two companies have been growing revenue at remarkable levels. Through the first nine months of 2013, Twitter's revenue grew at an annualized rate of 167%. Facebook's growth was as equally impressive for a company that was already so large, standing at 43%:

Source: Company SEC filings.  

The same cannot be said of Twitter's earnings power, as the company reported a net loss of $344 million in the 45 months from January 2010 to the end of last September, including a $133.8 million loss through the first nine months of 2013. In its S1 filing before the IPO, the words "net income" were never mentioned. "Net loss," on the other hand, was found 106 times.  

Buffett once said he operates with two rules: No. 1, "Never lose money," and No. 2, "Don't forget rule No. 1." It is therefore easy to see why Twitter would be immediately crossed off his investment consideration list. 

Facebook, on the other hand, tells a different story. If you exclude for share-based compensation, it has done a rather impressive job at growing its income:

Source: Company SEC filings.

While its trailing price-to-earnings ratio stands at 141, it's forward earnings ratio is at 49, according to the latest Thomson Reuters estimate. Although that is remarkably high, according to the September  holdings, Buffett also owns more than $750 million of Liberty Media (NASDAQ:LMCA), which has a forward P/E ratio of 33, according to the same estimate. 

Throw in Buffett's oft-repeated quote, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," and perhaps an investment in Facebook wouldn't be out of the question. However Buffett's words in a letter to shareholders say exactly why he'd never buy Facebook.

Not in the business of picking winners
In that 2001 letter, Buffett said: "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."

While this was nearly 12 years ago, it was also right as the bubble from the technology boom began to burst; the S&P 500 would fall by more than 30% over the next two years, while the Nasdaq would drop by almost 45%.


Taking a step backward reveals that while Facebook currently sits on top of the social network landscape, the industry itself is largely in its infancy. While few would call Facebook an "unproven" enterprise, consider the recent Princeton study that projected the company would lose "80% of its peak user base between 2015 and 2017."

Facebook has refuted that claim, but its chief financial officer said it "did see a decrease in daily users specifically among younger teens." Just last week Time magazine reported "More Than 11 Million Young People Have Fled Facebook Since 2011." These findings bear witness to the reality that the business Facebook is in remains in the midst of fluctuation and growth, and it will likely be years before the ultimate best company emerges.

There is no denying that Facebook, as a business and a stock, has been on an impressive run over the years, but when considering it as a long-term investment like Buffett always does, there is also no denying that many questions remain.

More wisdom from Warren
While he may not buy Facebook or Twitter, the reality is, at last count Buffett owned 43 stocks worth more than $90 billion. He is one of the greatest investors ever and through the years, Buffett has offered up market-beating investing tips to shareholders of Berkshire Hathaway worth billions. If you want more from Buffett, now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Fool contributor Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway, Facebook, and Twitter. The Motley Fool owns shares of Berkshire Hathaway, Facebook, and Liberty Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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