Warren Buffett loves buying companies on the cheap. After tumbling nearly 50% so far in 2014, Twitter (NYSE:TWTR) is a whole lot cheaper. Could Buffett be a buyer?
The difficult five months
2014 has been rough for Twitter. Wall Street was disappointed with its user growth. Its employees can begin selling their shares. And the lofty valuation has caused many to unload the popular social media site. Fear is in the air.
Warren Buffett of Berkshire Hathaway once famously remarked:
Be fearful when others are greedy, and be greedy when others are fearful.
And he has made no secret that he's looking to make a major acquisition. The natural question then becomes, would Warren Buffett acquire Twitter?
The big elephant
Buffett has reiterated his desire to make major acquisitions, and in 2010, he noted in order for Berkshire Hathaway to continue to deliver returns:
We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.
In 2012, CNBC and New York Times journalist Andrew Ross Sorkin noted:
buffett just said he almost made a $22 billion acquisition in the past couple of months. what do you think it was? #buffettwatch— Andrew Ross Sorkin (@andrewrsorkin) May 5, 2012
Of course there was the major acquisition of Heinz in 2013, but Buffett added in this year's letter he continues to search for elephants.
Buffett aims to keep around $20 billion of Berkshire's cash on hand. But he has nearly $50 billion of cash sitting around, meaning there is more than enough for Buffett to be comfortable making a major buy.
With Twitter having a market value of $18 billion, a 50% premium would still leave Buffett with plenty of cash.
So Buffett is looking to make a big splash, Twitter falls in his price range, and he's always a fan of the market overreacting. Does Twitter have everything the Oracle of Omaha is looking for?
In 2012, Buffett bought 28 newspapers (yes, physical papers) for nearly $350 million. Although they were small purchases in his book, he added he loved newspapers and he would buy anything "if their economics make sense."
Although he openly admitted "advertising and profits of the newspaper industry overall are certain to decline," he went on to say:
News, to put it simply, is what people don't know that they want to know. And people will seek their news– what's important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost.
Think about that for a second.
Buffett was drawn to newspapers first if their economics made sense, but secondly because they provide "immediacy, ease of access, reliability, comprehensiveness and low cost" of what people want to see.
Put simply: On an exponentially greater scale, Twitter offers all six of those identical characteristics.
People can follow who and what is important to them -- whether they be papers, celebrities, friends or anything else -- see tweets instantly, consistently, and easily on their phones or computers, and easily follow links for more detailed information.
And the only thing better to customers than low cost is no cost.
With that in mind, it's not crazy to think Twitter's business model may pique the interests of Buffett.
The four key characteristics
Taking it a step further, Buffett once said when considering buying a business:
Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.
In fact, it can be argued Twitter meets all four of those characteristics too. It's simple. It's ad revenue nearly doubled -- from $0.74 to $1.44 per 1,000 views -- over the last year. It has a remarkably successful management team. With the plummeting price, Buffett may suggest its current value is "sensible."
Yet the real hang-up on Buffett's potential Twitter decision comes when he later added he would "rule out companies in industries prone to rapid and continuous change," and "the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines."
The rapid change in the social media landscape and the significant investments needed at Twitter (it reported a loss of $132 million in the first quarter) highlight its negative characteristics.
Twitter meets some of the key qualifications for a Berkshire Hathaway purchase, but it falls short in others.
The final thought
After the tech bubble burst in 2001 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.
In 2009, he added:
Charlie and I avoid businesses whose futures we can't evaluate, no matter how exciting their products may be.
It's easy to dream of Buffett buying Twitter, but the likely reality is, he never will. Although it has certain qualities Buffett loves to see, it has too many which turn him away.
While that's not to say neither you nor I should mark Twitter off our lists, we will not see Twitter #BoughtByBuffett anytime soon.