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Berkshire or Facebook?


shalab
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Somebody noted in the BRK thread that the market caps of Berkshire and Facebook are now identical - what is a better buy now and why? We know Watsa's answer to this but wondering what this board thinks.

 

Interestingly, operating earnings (before tax) growth at facebook before taxes for full 2015 is 25% whereas it is 18% for the first nine months of 2015 for Berkshire. Per share growth is lower at facebook because of dilution at 17%.

 

If one looks at share holder equity, FB has 44B in equity whereas BRK is at 248B after nine months of 2015 and likely crossed 250B by year end.

 

 

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Somebody noted in the BRK thread that the market caps of Berkshire and Facebook are now identical - what is a better buy now and why? We know Watsa's answer to this but wondering what this board thinks.

 

Interestingly, operating earnings (before tax) growth at facebook before taxes for full 2015 is 25% whereas it is 18% for the first nine months of 2015 for Berkshire. Per share growth is lower at facebook because of dilution at 17%.

 

If one looks at share holder equity, FB has 44B in equity whereas BRK is at 248B after nine months of 2015 and likely crossed 250B by year end.

 

I don't think there's an easy answer to this question.  I emailed a bunch of friends in 2007 with a similar "Berkshire vs. GOOG" comparison when they both had $220 bil market caps.  Obviously I was strongly in favor of Berkshire at the time, but ended up being dead wrong. Today:

 

GOOG: $511 bil market cap

BRK: $318 bil market cap

 

 

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I think shareholder equity is irrelevant for value of a business (that is not an investment business). Buffett has even said the best business is one that has zero equity and spits out a ton of cash.

My answer to this is which business do you understand? Nothing wrong to forfeit a higher return in favour of a lower return that you understand how it was produced. Seems Berk has more diverse streams of income than FB or GOOG which seem to be more advertising based? But someone else maybe understood FB or GOOG better and made a ton of money with it.

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It's not as easy to understand BRK as people portray. Has some large, very cyclical components to it.

 

FB and GOOG are secular growers. Will be for many years, most likely. Easy to understand business. Easy, easy. The model is so simple. The concern is maybe the valuation's too high. I own both GOOG and FB but not BRK, so I guess I'm voting with my money. But I suspect BRK will do quite well over time.

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It's not as easy to understand BRK as people portray. Has some large, very cyclical components to it.

 

FB and GOOG are secular growers. Will be for many years, most likely. Easy to understand business. Easy, easy. The model is so simple. The concern is maybe the valuation's too high. I own both GOOG and FB but not BRK, so I guess I'm voting with my money. But I suspect BRK will do quite well over time.

 

Both those companies fb/goog have high inside ownership, share of mind/market, high roe and young(er) management.  Berkshire is great and at these prices I'm kinda interested--however the lack of succession is an issue to me.  There really isn't one berkshire business which is a pro and a con. Lastly, whether the next CEO is Greg Abel, Ajit Jain or someone else I would wonder what % of their net worth is in berkshire.

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Guest Grey512

FB is the better investment over 10 years, 15 yrs, etc.

The founder/CEO is not even in his 40s. He is maniacal about maintaining and growing FB's moat, and will throw wads of cash at whomever can threaten it in a few years (e.g. look at what happened with Instagram).

I am fairly confident about FB being a decent long-term idea yet I don't own FB. A general Internet section correction could shave off 30% off the stock. Waiting for a better entry point. That's my weakness.

I don't own BRK either.

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FB is the better investment over 10 years, 15 yrs, etc.

The founder/CEO is not even in his 40s. He is maniacal about maintaining and growing FB's moat, and will throw wads of cash at whomever can threaten it in a few years (e.g. look at what happened with Instagram).

I am fairly confident about FB being a decent long-term idea yet I don't own FB. A general Internet section correction could shave off 30% off the stock. Waiting for a better entry point. That's my weakness.

I don't own BRK either.

 

I disagree.  The difference in earnings power of the 2 companies is just massive.

 

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FB is the better investment over 10 years, 15 yrs, etc.

The founder/CEO is not even in his 40s. He is maniacal about maintaining and growing FB's moat, and will throw wads of cash at whomever can threaten it in a few years (e.g. look at what happened with Instagram).

I am fairly confident about FB being a decent long-term idea yet I don't own FB. A general Internet section correction could shave off 30% off the stock. Waiting for a better entry point. That's my weakness.

I don't own BRK either.

 

To your point about throwing money at anyone who threatens the moat - it worked with Instagram but failed with Snapchat. Technology is such a fickle beast.

 

Too hard for me to answer, FWIW.

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Guest Grey512

Snapchat is a bubble, IMO. I know this may be heresy to some of the younger folks on COBF but Instagram and WhatsApp are way more valuable businesses that Snapchat. Snapchat is a P-O-S. There, I've said it.

 

So if I was an FB shareholder, I would be glad that FB didn't buy Snapchat, even if FB would be looking at a big unrealized gain right now.

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I admire the certainty that you evaluate these dynamic businesses with. You are sure about what will happen with Facebook during the next 15 years. Consider me extremely skeptical.

 

Company B generated more FCF last year than company F did in its lifetime. Company B has a gazillion year track-record, Company F has no track record. Company F trades at 7x book and 88x TTM earnings. Company B trades at 1.3x book and 14x TTM earnings. I'm a simple guy. My numbers might be 50% off, I don't even care. Company B any day.

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Guest Grey512

All the information is in the past, and all the value is in the future.

Said another way: which company is creating more value *right now* and *in the future*: FB or BRK?

 

 

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Probably a rough year or two (or more) for Berkshire, but over 10+ years I'd say Berkshire earns way more than Facebook.  Problem is the starting point.  Buffett at the end of his time on this planet, insurance isn't that great today, lots of secular headwinds, and now some tough cyclical headwinds. 

 

If it turns out to be Facebook then Zuckerberg will be worth hundreds of billions.  Also the combined market caps of these new advertising stocks is discounting a hell of a lot in the future (close to a trillion between just GOOG and FB).  I think investors are taking a ruler out too far into the future when trying to value these stocks.  Great companies but I'd rather buy Berkshire and leave it alone for ten years.

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It's not as easy to understand BRK as people portray. Has some large, very cyclical components to it.

 

FB and GOOG are secular growers. Will be for many years, most likely. Easy to understand business. Easy, easy. The model is so simple. The concern is maybe the valuation's too high. I own both GOOG and FB but not BRK, so I guess I'm voting with my money. But I suspect BRK will do quite well over time.

 

Do you think Google and Facebook have more predictability of earnings than the Burlington Railroad, Berkshire's reinsurance business, Coca-Cola, American Express, Wells Fargo, Heinz/Kraft Food, Berkshire Hathaway Energy (the utility business) and the other large components of Berkshire? Do you feel as confident that FB/GOOG will deploy incoming capital successfully as Berkshire? I am curious. My guess is that, the insurance business excepted, these major units are roughly a hundred years old on average, are in the same businesses they basically always have been in, and the reinsurance business itself is the only one like it in the world with no close second.

 

It's one thing to be optimistic about Facebook's future profitability -- that's going to be a judgment call. And stock valuation makes the comparison even harder. But predictability of earnings?

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