The closely watched investment portfolio of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is well known for its massive stock positions in tried-and-true companies like Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), American Express (NYSE: AXP), and many others, as well as its purchases of rock-solid, established businesses.
So, it may come as a surprise to learn that two of Berkshire's latest investments weren't blue-chip stocks or acquisitions of long-profitable companies. Rather, Berkshire recently decided to try something new and add two fintech investments to its portfolio.
Two fintech investments have been added to the portfolio
It was recently reported that Berkshire Hathaway has invested about $600 million in two major fintech companies, both of which are based in emerging markets. In August, Berkshire invested $300 million in Indian mobile-payment company Paytm, and just recently, Berkshire invested about $300 million in StoneCo (NASDAQ:STNE), a Brazil-based payment processing company that recently went public.
Paytm, which is a private company, is an e-commerce payment company and is similar in nature to U.S.-based PayPal. Berkshire's $300 million investment translates to a roughly 3% to 4% stake in the company. The company has a run rate of about 5 billion transactions per year and is growing rapidly.
StoneCo went public just last week, and Berkshire Hathaway's interest was reported even before the IPO had occurred. The company provides a variety of financial services in Brazil such as payment processing solutions like POS [point of service] terminals, with more than 200,000 merchants on its roster of customers.
StoneCo went public at an IPO price of $24 and is currently trading for more than $30, so assuming all of Berkshire's shares were purchased at the IPO price, the company is sitting on a 25% unrealized gain on its investment already.
To be clear, it's important to point out that these investments were reportedly not made by Warren Buffett. Rather, they were the work of Todd Combs, one of Buffett's two trusted stock-picking lieutenants.
How does this fit into Berkshire's strategy?
At first glance, these fintech investments may seem to be far outside of Berkshire's wheelhouse. After all, neither company is particularly mature, they are both based outside of the U.S., and Berkshire has historically avoided tech-heavy investments -- particularly when it comes to fast-growing tech companies.
However, a closer look shows why Combs may have chosen these two investments for Berkshire's portfolio. For one thing, both have a huge market share in their respective countries, a trait that's quite common among other Berkshire investments.
Furthermore, Berkshire has made big investments in the banking industry, so some fintech plays could be more within Berkshire's wheelhouse than they may seem. Berkshire investments Bank of America (NYSE: BAC) and American Express, just to name a couple, have major fintech projects of their own. Buffett loves the banking business, and fintech solutions are certainly a part of the business in the 21st century.
Finally, considering that Berkshire has had a major cash problem for a long time -- over $100 billion and nothing to spend it on -- it's not surprising that the company may be trying to broaden its investable universe in new ways. Buffett has openly vented his frustration with the lack of opportunities and has spoken of his desire to find places to put the company's money to work.
While a $600 million investment is relatively small by Berkshire's standards (just over 1% of the company's market cap), this is certainly a significant investment as it could represent a new realm of possibilities for the company's cash. Don't be surprised if these are just the first and second of more fintech investments to come for Berkshire and its investment team.
Matthew Frankel, CFP, owns shares of American Express, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends PayPal Holdings. The Motley Fool has the following options: short January 2019 $82 calls on PayPal Holdings. The Motley Fool has a disclosure policy.