Warren Buffett‘s Berkshire Hathaway (NYSE:BRK.B) crushed the S&P 500 (SPX) last year as the tides turned back in favor of value stocks. Though the old-school conglomerate is famous for investing in “boring” companies with predictable cash flows in most environments, it’s quite interesting that there are some intriguing innovators in the Berkshire stock portfolio that don’t fit the bill as a traditional Warren Buffett stock, implying that it’s not just Buffett making the decisions. Indeed, Berkshire’s Ted Combs and Todd Weschler (Ted and Todd) will be the investment managers more involved in calling the shots, moving forward. In this piece, we’ll check out two Berkshire-owned tech stocks — SNOW and TSM — that may be worth a second look amid the tech carnage.
Buffett has shied away from tech stocks for most of his career. So, it came as a shocker when the firm got involved with Snowflake a few years back. Snowflake is a big-data company that exploded onto the IPO market in 2020. The stock soared out of the gate, but the significant gains were since surrendered following the brutal 2022 market sell-off.
These days, SNOW stock is hovering closer to its IPO price and could risk falling below the level. In any case, Snowflake stock was one of the market’s priciest (based on price-to-sales) names. Yet, the value-conscious Berkshire continued to hang onto the name, with no objections by Warren Buffett.
While it likely was not Warren Buffett who bought into Snowflake in the first place, I think the move is a testament to his trust in his partners. Snowflake was probably one of the last companies in which Buffett himself would have purchased shares. Not only is it a tech stock that’s hard for most people to understand, but the price tag was also more than enough to make most value investors cringe.
Undoubtedly, the hyper-growth trade continues to be out of favor, with the Federal Reserve “threatening” to raise interest rates further. Such hawkish commentary has not been good news for tech dip-buyers.
In any case, Snowflake continues to be one of the most intriguing innovators in this market. The shares trade at over 21 times sales at writing – still wildly expensive. However, when you consider the firm is capable of reaching free-cash-flow margins in the ballpark of 25% (Snowflake’s long-term goal), it’s apparent that it isn’t like most other speculative growth stocks out there.
Snowflake’s platform gives its users the tools it needs to unlock the power of data. Even as IT spending budgets stall into a recession (the usage-based revenue recognition model will do Snowflake no favors over the coming quarters), one has to think that Snowflake’s value-adding service will become indispensable in future downturns.
For now, there’s a ton of growth ahead of Snowflake. An upcoming recession seems to me like a speed bump more than anything else. Snowflake could prove a very compelling Buy for those willing to brave the tech downturn.
Sure, 21 times sales is hardly a steal. However, compared to where the stock was (think 100+ times sales) and the long-term growth potential, I view SNOW stock as one of the few hyper growers that’ll live to see new highs.
What is the Price Target for SNOW Stock?
Wall Street analysts still like Snowflake despite recent price target downgrades. The average SNOW stock price target of $185.95 implies 36.3% gains based on 18 Buys and seven Hold ratings assigned in the past three months.
Taiwan Semiconductor (NYSE:TSM)
Taiwan Semiconductor is a less surprising tech name in the Berkshire portfolio, given its modest P/E multiple of about 14x.
Berkshire has a much larger position in TSM ($4.1 billion stake as of November) than SNOW (less than 1% of the portfolio), and it’s no mystery as to why. The company is absolutely essential to the health of the global chip industry. When Taiwan Semi goes down, it’s a tough time for many hardware firms.
Undoubtedly, a significant risk beyond the coming recession for TSM is geopolitical. A Chinese move into Taiwan could have severe implications for TSM stock.
Regardless, Berkshire tends to think the reward is well worth the risk. Pending the outcome of a low-probability, high-impact event, TSM stands out as a wildly-profitable, high-margin chip foundry with a vast moat.
What is the Price Target for TSM Stock?
Wall Street has a “Strong Buy” consensus rating on Taiwan Semi, with the average TSM stock price target of $104.00, indicating 29% upside potential from here.
Ted Combs and Todd Weschler from Berkshire will be making more investment decisions for Buffett, going forward. Whether that means more tech names will gain entry into the Berkshire Hathaway portfolio remains to be seen.
Regardless, I think the “new” Berkshire portfolio is worth keeping an eye on as it embraces tech in a market where it’s heavily out of favor.