During the dotcom boom, Warren Buffett famously resisted investing (through Berkshire Hathaway) in technology companies. His reason was simple: don’t invest in anything that you don’t understand. Fast forward to 2022, and Berkshire Hathaway is invested several large tech companies.
This article looks inside Mr. Buffett’s tech holdings (Tech Bag) to gain insight from his and Berkshire Hathaway’s view of the tech sector. Thorough financial analysis of these companies is beyond the scope of this article, but will instead be covered in future articles. Stay tuned!
The dataset used for this article is below. It was compiled from the SEC’s 13F-HR quarterly filings, which contain Berkshire Hathaway’s ownership of publicly-traded shares, from all four quarters of 2021.
https://docs.google.com/spreadsheets/d/1vR1rrf-onc27zqjicdC2Yut41Tyro-Olf6F_smYsBY8/edit?usp=sharing
The original data source is here: https://www.sec.gov/edgar/browse/?CIK=1067983&owner=exclude
The Tech Bag
It is typical for mega institutional investors such as Bridgewater, Renaissance Technologies, TRowe Price, FMR (Fidelity’s parent company), Blackrock, etc. to hold as many as 5,000 stocks in their portfolios. By contrast, Berkshire Hathaway holds relatively very few stocks (only 52). This difference in portfolio size reflects Warren Buffett’s distinctive approach to investing: be very selective and very focused.
The selection criterion for the Tech Bag is: the company generates revenue (output) by creating technology, as opposed to using technology as input to provide a product or service.
Verisign, American Express, Visa, and Mastercard are in Berkshire’s portfolio. Some may argue that they are tech companies, but they rely on technology as input to their business model to provide payment services. Therefore, they were not included in the Tech Bag.
On the other hand, Apple, Snowflake, Amazon, Nu Holdings, Activision Blizzard, and StoneCo were selected into the Tech Bag because their revenues come directly from the technologies that they create. In other words, technology is an output in their business model. And they are well-loved by Mr. Buffett, as he directed Berkshire Hathaway to either maintain or added more shares in 2021; he did not sell a single share of these stocks.
Highlights
Below are highlights from Warren Buffett and Berkshire Hathaway’s Tech Bag, in order of relative size in the portfolio. These highlights are intended to help you get started on your research process.
Apple: Berkshire has held 887,135,554 shares throughout 2021, worth a whopping $157 billion (comprising 47% of its entire portfolio of publicly traded stocks) as of Dec. 31, 2021. This makes it, by far, the largest holding; for perspective, the next largest holding is Bank of America, at 13%. It is well-known that Apple is highly profitable (currently earning $6 per share), and even pays a dividend to the tune of $14 billion annually from 2018-2021. Approximately $800 million has gone to Berkshire Hathaway every year, based on a ~ .52% dividend yield, allowing the firm to deploy the cash into smaller, newer, riskier ventures.
Snowflake: It was widely reported that Berkshire invested $735 million in pre-IPO shares of Snowflake, a cloud-computing company that went public in October 2020. This investment is now worth $2 billion, representing .63% of the entire Berkshire portfolio — a tiny drop in the bucket relative to Apple, but a very good return on investment for Berkshire. Though Snowflake has negative profit margins, its revenue growth has been growing impressively at 120% compounded annual rate (or tenfold from $97 million to $1 billion) since 2019.
Amazon: Berkshire owns $1.8 billion (.54% of its total portfolio). Amazon may have its roots in selling books online, but its innovation in cloud computing (Amazon Web Services/AWS) has made the company dominant in this area. In 2021, Amazon’s AWS revenue was $62 billion, 3x Google Cloud’s $19 billion, and 5x Microsoft Azure’s $11.7 billion. Though already a mature company, Amazon’s business has been growing rapidly at a compounded annual rate of 26% from 2018 to 2021.
As a side note, despite being friends with Bill Gates and having high respect for him, Warren Buffett does not own any Microsoft shares. This is an example of how Warren Buffett separates his emotions from his business decisions.
Nu Holdings: A new position as of 2021Q4, this is the parent company of Nubank, a fintech/digital banking company competing with traditional banks in Latin America (Mexico, Colombia, and Brazil). It went public in Dec. 2021, and Berkshire was a pre-IPO investor, whose position in this company is worth ~$1 billion. NU has been growing its revenue at a compounded 55% annual rate since 2018.
Activision Blizzard: Also a new position as of 2021Q4, this is a gaming company that is an acquisition target by Microsoft, pending regulatory approval. It has been a public company since the early 90s, when it was trading in the $1 dollar range. Berkshire’s entry price was about $66. This is another reflection of Warren Buffett’s philosophy (to paraphrase): it is not too late to buy a great company when the price is fair relative to its future potential.
StoneCo: This is another fintech company, based in Brazil. It is the most beaten-down stock in the Berkshire Tech Bag. Throughout 2021, Berkshire held on to every single share, from Q1 (worth $655 million) to Q4 (worth $180 million) — a 72% plunge in value. From 2018 to 2021, the company’s revenue grew from $1.5 billion to $3.7 billion, a 35% compounded annual rate.
Again, I will save detailed analysis of these six tech companies for future articles.
What Can We Learn From This?
One can infer Warren Buffett’s view on technology companies based on Berkshire’s buying and selling of their shares. As mentioned at the beginning of the article, Berkshire Hathaway has not sold a single share of the Tech Bag stocks discussed here, reflecting high confidence in them, unlike the recently-purged airlines and IBM.
For further perspective, Nu Holdings and Activision Blizzard sit in the middle of the portfolio when ranked by value; they are ranked 23rd and 24th out of 52, despite being new investments. This is another sign of Warren Buffett’s confidence in them.
The common threads that run through Warren Buffett’s Tech Bag are market dominance and high growth. For the larger positions, such as Apple, profitability, value, growth, market dominance, and dividend income play a role in his portfolio. For the smaller positions, high revenue growth and market-dominance potential are key.
Mr. Buffett’s approach is to reinvest dividend income generated from Apple and others (Bank of America, American Express, etc.) in smaller, newer tech positions, such as Nu Holdings and Activision Blizzard. This is a strategy that I am happily employing and advocating.
Conclusion
In his own words, Warren Buffett once said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This means that it’s okay to be late on an investment and pay a little higher prices, as long as it is a great company. As shown by Apple and Amazon, great companies keep thriving and adapting to new challenges.
Now that Warren Buffett and company have helped us to identify great tech companies, the next step is to evaluate how fair their current prices are. Are we too late? Or are there still buying opportunities? These questions will be answered in upcoming articles, specifically for the six stocks in Warren Buffett’s Tech Bag.
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