Warren Buffett likes bargains. Sure, he isn’t the purist value investor that he was back in his younger days. However, the multibillionaire still likes to get the most bang for the buck when buying a stock.
And that leads me to Meta Platforms (NASDAQ: META). The Facebook parent’s shares currently trade at a price-to-earnings multiple of only 12.4. Meta stock is now more than 60% below its all-time high reached in mid-2021.
Return on invested capital (ROIC) arguably ranks as Buffett’s favorite metric. Meta’s ROIC over the trailing-12-month period is 26.2% — a level that the legendary investor should love. So why isn’t Buffett buying Meta Platforms stock hand over fist right now?
It isn’t a wheelhouse issue
In the past, Buffett has lamented not buying certain tech stocks earlier because he didn’t understand them well enough. Could that be the case now with Meta? Maybe.
As best I can tell, Buffett doesn’t have a Facebook account (although some fans have tribute pages honoring the legendary investor). I doubt he knows a lot about Oculus virtual reality devices or the metaverse.
But I don’t think the fact that Meta is out of Buffett’s wheelhouse is the main reason why he hasn’t loaded up on the stock. Actually, Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) portfolio includes several stocks that Buffett probably doesn’t understand all that well. We can chalk this up to the influence of Berkshire investment managers Ted Combs and Todd Weschler.
I suspect Buffett could understand Meta’s business just as thoroughly as he does Activision Blizzard‘s or Snowflake‘s or Taiwan Semiconductor‘s. These are just three examples of stocks that you’d ordinarily think are outside of Buffett’s sphere — yet Berkshire owns them.
Back to the valuation angle
I mentioned earlier that Meta shares trade at a low P/E multiple and are well below the peak level. However, we can’t automatically rule out the possibility that Buffett still doesn’t like the stock’s valuation.
Buffett doesn’t buy any stock unless he thinks it’s available at an attractive price compared to its earnings projections for at least five years into the future. It could very well be that he (and his two investing lieutenants) don’t have enough confidence in projecting Meta’s earnings.
That would make sense, if so. Meta’s social media apps face significant competition. Both revenue and profits have fallen significantly. And while the metaverse could present a huge opportunity for the company, there’s considerable uncertainty (to put it mildly) about Meta’s big bet on the virtual universe.
Still, I don’t know if the valuation objection is a slam-dunk reason why Buffett isn’t buying Meta. Aswath Damodaran is without question an expert at valuation. The NYU finance professor wrote some of the best books on valuation to be found. Based on his latest calculations of Meta’s value, its current market cap implies that the company’s metaverse efforts increase its value by only around $10 billion. That seems way too pessimistic.
The easy answer
So what’s the most likely reason why Buffett isn’t buying Meta stock hand over fist right now? I think there’s an easy answer: He believes that other stocks offer more attractive risk-reward propositions. In fact, this has to be the underlying reason since Buffett has bought plenty of other stocks in recent quarters and hasn’t bought Meta.
Perhaps the Oracle of Omaha has spotted show-stopper issues that caused him to take a pass on Meta. However, it could also be that he doesn’t necessarily have a big objection to Meta but simply likes other stocks better.
Buffett thinks about baseball the way a professional baseball star thinks about hitting. You don’t have to swing at every pitch — just the ones that are exactly to your liking. Different batters will swing at different pitches. In the same way, different investors will favor different stocks. It’s entirely possible that Meta could be a no-swing for Buffett but a home run for you.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Berkshire Hathaway and Meta Platforms. The Motley Fool has positions in and recommends Activision Blizzard, Berkshire Hathaway, Meta Platforms, Snowflake, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.