Key Points
Buffett has long been a value investor, but along the way he learned something else, too.
The best investments often involve a wonderful company simply trading at a reasonable price.
This year, his successor put this advice into action with one of Berkshire's investments.
Greg Abel has been CEO of Berkshire Hathaway for only about 10 months. But he's been at the company since 1999, so he's been able to learn from the Great Warren Buffett for decades.
While Buffett has always loved to buy value stocks trading at bargain prices, he learned from his right-hand man, Charlie Munger, who served as Berkshire's vice chair until his passing in 2023, that value doesn't always look like a beaten-down stock the market has abandoned.
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He took this advice to heart. In a 1989 letter to shareholders, Buffett wrote: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." The lesson seems to have stuck with Abel, too, who in recent months has plowed $930 million into a stock that embodies just that.
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Buying value in a seemingly legacy business
In July, Berkshire invested $600 million in Bending Spoons'(NASDAQ: BSP) initial public offering (IPO). Bending Spoons acquires or rolls up digital businesses, optimizes them, and then reinvests the earnings to buy more digital businesses.
Recently, another securities filing revealed that Berkshire has invested an additional $330 million, bringing its total stake in the company to about 4%.
Since Bending Spoons' inception in 2013, the company has acquired 50 businesses, including notable names like AOL, Eventbrite, and Vimeo, all three of which were acquired within the past two years. Results have been great. For the second quarter, Bending Spoons grew revenue 126% year over year to over $704 million. Diluted earnings per share surged 163% to $0.28. Adjusted operating margins were 54%.
While the company has taken on debt to fund acquisitions, Bending Spoons' net leverage ratio was 2.4x, which is manageable and not a cause for concern.
Another interesting thing about Bending Spoons is that while naysayers may view many of the companies it is purchasing as legacy technology or as companies that couldn't compete with peers, management is clearly bullish on the potential to layer artificial intelligence into these businesses.
For instance, at one of Bending Spoons' companies, Brightcove, a cloud-based video platform, AI was used to enable auto-translations, audio-track dubbing, and live captions in over 50 languages.
Ultimately, Bending Spoons' strategy aligns closely with Buffett and Berkshire's value philosophy, in which they seek out businesses the market may have abandoned but that have solid underlying fundamentals and good stewards of capital who can unlock shareholder value.
Where the stock stands today and a good lesson for investors
Now, investors should understand that Berkshire bought shares at significantly more attractive levels than where the stock trades today. The company was priced at $29 per share in the IPO, and Berkshire's recent $330 million purchase was at $33 per share.
As of this writing, the stock trades at nearly $54.50 and has a market capitalization of nearly $35 billion. Even though revenue and profits are growing quite nicely, the stock now trades at nearly 39 times forward earnings and 11.6 times forward sales.
Whether that valuation is reasonable is debatable, but the stock is by no means a bargain right now. Still, it's a good business with strong long-term prospects, so investors can consider whether to start nibbling, practice dollar-cost averaging, or add it to their watch list and wait for better entry points.
Overall, I think Berkshire's purchase of Bending Spoons is a good lesson that Buffett, Munger, and now Abel have been teaching for decades. Just because a business isn't in the hottest sector or is an old name doesn't mean there isn't good value there.
It depends on management, how the business is run, and ultimately, the financials. Abel and his team saw a good opportunity and have already been rewarded. There's always value to be had in every market, regardless of the environment.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
