Cash glut at Warren Buffett's Berkshire may trap tech titans next

Jeff Bezos, since stepping away from Amazon.com Inc., has become the latest billionaire to head to space. Meanwhile, Facebook Inc.’s Mark Zuckerberg is eyeing life in the metaverse. But don’t expect to see Warren Buffett riding on the next rocket ship for his 91st birthday this month or talking up virtual dimensions in Berkshire Hathaway Inc.’s earnings report Saturday.
 

Unlike some of his ultra-wealthy peers, Buffett still prefers the nuts-and-bolts businesses of Planet Earth, such as keeping people’s lights on and delivering goods by freight train. That old-fashioned mind-set is why Berkshire’s market value hasn’t taken the same rocket ride as Amazon or Facebook, even though its operating earnings are much the same. With Buffett hoarding more than $100 billion of cash at Berkshire the last few years, the perception is that the investing icon has lost his touch in a technology-driven economy that would seem to be full of investment opportunities.

But even as Buffett is criticized for that cash stockpile, it actually puts him in quite good company. Amazon — now led by CEO Andy Jassy — and Zuckerberg’s Facebook are each sitting on a heap of cash, too, as are Tim Cook at Apple Inc., Sundar Pichai at Google’s parent Alphabet Inc. and Satya Nadella at Microsoft Corp. Other than Berkshire, these are the most cash-rich companies in America and the most valuable.

Berkshire’s balance sheet was once a playground for Buffett and his followers, who would study the bread crumbs in his annual letter for hints about the next big acquisition. Lately, though, his followers have given up on guessing because Buffett seems to think anything worth buying is too expensive or risky now. (It doesn’t help that his most recent big acquisition, the $37 billion deal for Precision Castparts five years ago, resulted in a writedown.) Without the splashy dealmaking investors had come to expect from Buffett, there’s little for them to get excited about, regardless of how much money Berkshire earns. 

As it gets set to report another unsung quarter of results Saturday, it could serve as a word of caution to the tech visionaries: There’s a downside to CEOs encouraging cults around their own investing genius that can take the focus off of the business’s profitability and durability. Buffett has basked in the personal limelight throughout his five decades building Berkshire, as Bezos did while at Amazon’s helm and Tesla Inc.’s Elon Musk is doing now. But younger investors aren’t as enthralled with Buffett or his value-investing wisdom, and that’s held back Berkshire’s stock price.

What they’re missing is that Buffett built this awe-inspiring collection of engines that take turns picking up the slack when another stalls out. It’s perhaps the only conglomerate that works exactly as intended. And especially now, its results can provide a scenic tour of the U.S. economy as each industry and state tries to navigate its way out of the pandemic. Still, every quarter investors obsess over the cash figure, which was $145 billion at the end of March. The only way Buffett seems to be spending it these days is through share buybacks because Berkshire has been a net seller of stocks and an M&A spectator for much of the past year. Later this month, we’ll learn what if any equity stakes he took during the period. (Notably, tech investments are a part of the portfolio now, including a large stake in Apple.)

Buffett’s primary reason for not spending Berkshire’s cash is much different from what may be holding back the Cook and Zuckerberg cohort, a less price-sensitive crew. Any big acquisitions for them are at least temporarily off limits because antitrust regulators under the Biden administration and an expanding group of lawmakers have essentially said: “Don’t you dare.” That regulatory heat isn’t entirely directed at tech companies — it recently torched one of Berkshire’s deals, too. But it’s clear who government officials are primarily targeting.

It leaves everyone else to wonder what on Earth — or beyond — Big Tech will do with all that cash. And no one is more afraid of the answer than the businesses that sit in adjacent industries such as internet providers, streaming-video services and even companies in health care. That said, with a more limited ability to acquire formidable upstarts and neutralize competitive threats, Big Tech is left to see how it fares among an investor base that it drove to be preoccupied with revenue growth. Shares of Amazon have already begun to retreat from their vaunted status, as Jassy grapples with a slowdown in e-commerce sales and a more competitive cloud-services landscape. Apple’s results last week were overshadowed by worsening supply constraints that are affecting the iPhone and iPad.

These tech companies can at least plow money into research and development of new products that may have a shot at becoming their next big thing. That’s something Berkshire can’t do. But Buffett does have the benefit of a long memory that it behooves hotshot CEOs like Zuckerberg to study. At Berkshire’s May shareholder meeting — which because of Covid-19 was reduced from a celebratory festival into an online webinar — Buffett kicked things off by showing a list of the 20 most valuable companies in the world in 1989. None of them still held that status in 2021. “1989 was not the dark ages,” Buffett told his viewers. “We were just as sure of ourselves as investors in 1989 as we are today. But the world can change in very, very dramatic ways.” 

It may remain one of Buffett’s most memorable lessons. Even as tech company after tech company has joined the $1 trillion and then $2 trillion market-cap club during the pandemic, they all have something in common with Buffett: more cash than they know what to do with. It’s a good problem to have until it isn’t.