The words “Warren Buffett (Trades, Portfolio)” and “tech stocks” did not often previously appear in the same sentence together, but that has changed in recent years.
The sector grew to encompass 27.7% of his portfolio in the third quarter, its largest representation in nine years of data. It has previously ranged between 7.53% of the portfolio in the second quarter of 2011 and 24.75% of the portfolio in the second quarter of 2018.
“Well, we avoided the tech stocks, but as we felt we had no advantage there and other people did and I think that’s a good idea not to play where the other people are better,” Buffett’s partner, Charlie Munger (Trades, Portfolio), said at Berkshire Hathaway’s annual meeting in 2017, after growing the stake in Apple (AAPL, Financial) to more than 100 million shares.
Berkshire (BRK.A, Financial)(BRK.B, Financial)’s expansion in technology has to do with more than its much-discussed stake in the iPhone maker. In the third quarter, it also initiated a position in Oracle Corp. (ORCL, Financial) and held on to its position in VeriSign Inc. (VRSN, Financial). So far, Berkshire has estimated gains on two of the stocks.
The tech positions are situated in Berkshire Hathaway’s $221.02 billion portfolio that lists 46 stocks of public companies, primarily in the financial and consumer defensive sectors. Co-managers Ted Weschler and Todd Combs each oversee a portion of the portfolio and may have had a hand in establishing some of the tech positions.
Oracle Corp. (ORCL, Financial)
One of Berkshire’s portfolio managers bought 1.09%, or 41,404,791 of Oracle’s outstanding shares in the third quarter, making it 0.97% of the portfolio. Its share price of $47.32 Thursday represents a 2.57% decline from its third-quarter average share price of about $49.
Oracle’s shares have made an upward trek since their plunge in tech bubble at the turn of the century but saw little movement recently. Up 26.5% over the past five years, they sank 5.72% in the past 12 months.
Yet the company, which makes semiconductor computer circuits used by companies such as Apple, still appears relatively expensive by some measures. Oracle has a price-earnings ratio of 51.86, higher than 76% of the global software industry and far above its historical median of 18.3. Its price-book ratio of 4.72 hovers near a 10-year high.
Meanwhile, it offers a 2.3% dividend yield and has generated billions in free cash flow annually over the past decade.
Buffett has owned the stock in the past. Wary of tech, he sold out of a 7.7 million-share stake in 2012, less than a year after buying it at the same time he bought recently dumped IBM (IBM).
Intel posted positive headline results in the third quarter, with record quarterly revenue of $19.2 billion, an increase of 19% year over year, and growth across all segments. Net income rose 42% to $6.4 billion, or $1.38 per share. It also raised its full-year revenue outlook by $1.7 billion to $71.2 billion and earnings per share expectations by 42 cents from $4.52.
Buffett and Ted Weschler famously acquired 252,478,779 shares of Apple from the start of 2016 to the third quarter this year. In total, they have staked out 5.32% of the giant, 25.79% of the portfolio and its largest position by far. Based on an average buy price around $146 per share and its trading price Thursday of $169.10 per share, GuruFocus estimates Berkshire’s gain on the holding stands around 16%.
Weschler made clear at least the main reasons he so adored the company in an interview with Germany’s Manager Magazin in 2016.
“It is cleaner to make the argument on Apple versus the past names that there is a subscription element to it,” Weschler said.
“As network speed has gotten faster and faster, and with it the information that people can absorb on the network, things like photo applications, and apps, they create a stickier ecosystem,” he added. “Once you are fully invested in the App ecosystem and you have got your thousands of photographs up in the cloud and you are used to the keystrokes and functionality and where everything is, you become a sticky consumer.”
Apple has faced difficulty recently, though, with its stock plunging 24% in November, caused mainly by its quarterly earnings report. Some investors disliked its guidance for the first quarter of 2019 revenue to be between $89 billion and $93 billion, representing a slowdown in year-over-year growth to between 1-5%, compared to its 20% growth in the fourth quarter. The company also announced that it would cease giving numbers of per-unit sales for its iPhone, iPad and Mac.
The drop off put Apple in more favorable valuation territory, giving it a price-earnings ratio near a two-year low at 14.23 and price-sales ratio also near a two-year low at 3.19.
VeriSign Inc. (VRSN, Financial)
At 0.94% of the portfolio, VeriSign represents the smallest tech stock in Berkshire’s portfolio and also the most successful. The Reston, Virginia-based company owns the registry for .com and .net web domains and offers internet securities services.
Berkshire acquired almost 13 million shares, of 10.71% of the company, from the fourth quarter of 2012 to the first quarter of 2015. GuruFocus estimates its gain around 237.92% based on its average buy price of $46 per share against Thursday’s trading price of $157. The company had a robust 2018, with its shares rising 43.5% year to date to near a 10-year high.
The company’s expansion has been helped by the ever-increasing popularity of the internet. On Dec. 6, Verisign announced that the number of domain names registrations rose 0.8% in the third quarter of 2018 to 342.4 million. VeriSign owned 151.7 million of the names, a 4% increase from the same period a year earlier.
The growing company has increased its revenue each year since 2008 and generated positive earnings since 2009. Free cash flow has also been positive over the past decade.
Weschler or Todd Combs, who likely started the VeriSign position, have opted not to buy more shares in more than three years as the price soared, however. VeriSign’s price-earnings ratio has increased to 38.2, far above its median of 24.73 and higher than 51% of the companies in the global internet content and information industry. Its price-sales ratio, at 16.1, is also near a 10-year peak.
In the third quarter, VeriSign reported $306 million in revenue, 4.6% higher than the same period a year earlier. Its net income reached $138 million, or $1.13 per diluted share, compared to $115 million, or 93 cents per diluted share, a year earlier. The company raised its guidance for full-year 2018 revenue to a range between $1.211 billion and $1.216 billion, from its previously expected range of $1.205 billion to $1.215 billion.
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