Mark Zuckerberg and Warren Buffett have far more in common than you might realize. Both men are very shrewd value investors who have built extremely profitable companies through a systematic program of strategic acquisition.
Buffett’s strategy of acquisition buying valuable but underpriced assets or good companies with the potential to generate a lot of cash is well known. His Berkshire Hathaway (NYSE: BRK.A) is actually a collection of extremely diverse companies – some of them in totally unrelated industries.
For example Buffett owns both the Burlington Northern Santa Fe railroad and the Fruit of the Loom underwear company. His holdings also include Dairy Queen; a popular chain of ice cream stands, and GEICO; one of America’s best known auto insurers.
Zuckerberg’s Empire of Acquisition
Since the beginning Facebook (NASDAQ: FB) has been following a similar strategy but few have noticed. Zuckerberg’s methodology is best explained in an infographic created by TechWyse’s Steve Toth.
Facebook has acquired 65 different companies over the past 12 years at an unknown cost. Its first acquisition was something called AboutFace back in August 2005 for a mere $200,000 (€178,187.25) The last known acquisition was Nascent Objects in September 2016 for an undisclosed price.
The total cost of these acquisitions is unknown because the details of many of the deals were never disclosed. Toth calculated the combined value of the disclosed Facebook acquisition costs at around $23.12 billion (20.35 billion).
Mark Zuckerberg Value Investor
Some of Facebook’s acquires such as Instagram, Oculus and WhatsApp are well known. Yet others such as Glancee and Two Big Ears are very obscure. Many of these purchases were ignored by the media – probably because Zuckerberg did not pay much for them.
Others like WhatsApp and Oculus acquisitions attracted a lot of media attention. Many people were shocked Zuckerberg spent $19 billion (€16.97 billion) to buy the money losing messaging solution WhatsApp in February 2014. That number seems justified by the number of WhatsApp users which reached 1.2 billion by February 2017 according to Statista.
Zuckerberg might have bought the largest media outlet in history for a mere $19 billion (€16.97 billion). That might make him the world’s greatest value investor because WhatsApp is a gateway to the internet and ecommerce for hundreds of millions of people in developing nations.
How Facebook might Harvest Billions in Revenue from WhatsApp
Even if Facebook can only make a few cents off just on a fraction of WhatsApp users it might be able to generate several billion dollars or euros in revenue every month. That revenue; like the money Berkshire Hathaway makes from car insurance premiums, can be used to finance additional acquisitions and harvest more potential revenue.
The business model is reminiscent of Buffett’s; and of that at Alphabet (NASDAQ: GOOG), which uses online advertising revenue to finance acquisitions. Alphabet’s core business is the Google search engine which enables targeted advertising. Facebook’s core business is social media which also enables targeted advertising.
Berkshire Hathaway’s business is also partially based on advertising revenue generated by newspapers it owns in the United States. Buffett has famously owned a large U.S. daily newspaper, The Buffalo News, for many years.
Facebook is a Value Investment
Facebook itself shares some financial characteristics with Berkshire Hathaway (NYSE: BRK.B) and Alphabet (NASDAQ: GOOGL).
Like its predecessors Facebook makes a lot of money. It reported a net income of $11.78 billion (€10.52 billion) on 31 March 2017; Alphabet reported a net income of $20.70 (€18.49 billion) billion on the same day. Berkshire Hathaway reported a net income of $22.54 billion (€20.13 billion) for the same period; first quarter 2017.
Facebook also generates a lot of cash; it reported a free cash flow of $3.787 billion (€3.38 billion) and $17.69 billion (€15.80 billion) in cash from operations on 31 March 2017. Alphabet reported a free cash flow of $7.131 billion (€6.37 billion) and $37.93 billion (€33.88 billion) in cash from operations for the same day. Berkshire Hathaway reported a free cash flow of $15.95 billion (€14.25 billion) and $43.39 billion (€38.75 billion) in cash from operations at the end of first quarter 2017.
All three companies also keep a lot of money in the bank; which makes acquisitions far easier. Berkshire Hathaway reported keeping $96.46 billion (€86.15 billion) in cash and short-term investments on 31 March 2017. Facebook reported $32.31 billion (€28.86 billion) in short-term investments and cash on the same day. Alphabet’s cash and short-term investments rivalled Berkshire’s at $92.44 billion (€82.56 billion).
The cash numbers indicate that Zuckerberg is more old fashioned value investor than new-fangled tech titan. His business strategies seem to owe more Benjamin Graham or Buffett than Steve Jobs.
What Investors Need to Know about Facebook
All this makes Facebook a value investment because Zuckerberg is following a proven and very sound business strategy that generates a lot of money. Even if Facebook is overpriced (it seems that way with a market capitalization of $434.84 billion (€388.37 billion) on 15 June 2017) investors will still make money from it.
If you are looking for a 21st Century value investment that will generate a lot of cash for many years to come Facebook would be a great choice. One reason for this is Mark Zuckerberg’s age; he’s just 33 years old; that means he’ll probably be out there acquiring profitable new companies for decades to come.
Therefore investors should not view Facebook as a “social media” company. Instead it is a powerful value investing strategy; that is paying off for its founder and stockholders, just as Berkshire Hathaway and Alphabet are. Even if you do not own a share of it, Facebook can teach you a lot about successful value investing in today’s interconnected world.