Hacker News Reader

Comment by yalogin | Hacker News Reader

Doesn't Buffet famously stay away from Tech? What changed? He is buying Yahoo and has invested in Apple.

Probably valuations dropped low enough that yahoo can be valued as a classic media company instead of a tech company.

What generally scares Buffet from tech is that the price of tech stocks is greatly inflated to reflect expectations of future growth. Buffet is very skeptical of inflated expectations of future growth.

But I do not think there is any great expectations of future growth in yahoo. In fact many analysts say that if you strip out the valuable asian assets, the value implied by the market for Yahoo's US business is about zero or even negative.

So the answer is that Yahoo is not really a tech stock anymore, but the traditional definition of that term. At least it is not priced like a tech stock.

> the value implied by the market for Yahoo's US business is about zero or even negative.

Probably precisely why Buffet is interested in it.

> In fact many analysts say that if you strip out the valuable asian assets, the value implied by the market for Yahoo's US business is about zero or even negative.

If the value implied by the stock price is zero or negative, then even buying the company and selling off the office furniture nets you a tidy profit.

More realistically, it's very likely that if a company has negative value -- ie, that someone would pay you to take it off their hands -- then it is severely undervalued.

I don't think that's true. Even badly performing companies like Yahoo! aren't only priced as a sum of their physical assets, but also intangible ones, e.g. the skills of their employees, their market position etc.

Someone actually did a calculation of this just recently, like about a month ago max. Adding up the Alibaba stake, the Yahoo Japan stake, the office and associated infrastructure, that summing those up totalled far less than the current share price. Somewhere around -8 billion IIRC.

It was a Bloomberg article[1] of rather disappointing quality. The authors apparently just took the market values of BABA and Yahoo! Japan, multiplied by Yahoo!'s percentage stake, added some unsourced number for cash and assets, and arrived at -$8 billion. They even included the statement, "The implication: Everything you think of as Yahoo—apps, websites, employees, computers, buildings—has a negative value."

It's terribly sloppy logic that led to this, as a pass through Yahoo!'s balance sheet[2] demonstrates. "Long-term Investments", which I presume includes their stakes in Alibaba and Yahoo! Japan, is listed as $34B (not the $38B in the article). Adding all other assets gets to a grand total of $44.1B. However, that is gross asset value, not book value. Now you have to take off the liabilities. Yahoo! apparently has $13 billion in deferred income tax on the books. It has about $13B in other liabilities, cutting its book value to about $28.4B and giving Yahoo! a price/book ratio of 1.21, not 0.81 as that analysis erroneously concluded.

You can't just compare gross assets to stock price and expect anything meaningful, and you sure as hell can't compare the values of a couple cherry-picked assets that sum up greater than the net equity and claim the entire rest of the business is worth a negative amount. I find it pretty shameful that Bloomberg actually published that clickbaity bullshit.

Yahoo!'s problem right now is not that their traditional businesses are unprofitable. Their problem is the massive liabilities they have on their books.

[1] http://www.bloomberg.com/features/2016-yahoo/

[2] https://www.google.com/finance?q=NASDAQ%3AYHOO&fstype=ii&ei=...

That someone was someone who didn't know basic addition (tax liability).

> if a company has negative value...then it is severely undervalued

Or severely fucked. Every company on the verge of bankruptcy skirts with negative equity value.

As for enterprise value, there are oil E&P companies trading below zero today. One must consider the costs of diligence, maintaining the asset until oil goes up and environmental clean-up. The economic value of some companies is questionable.

On Yahoo!, there is a difference between minority-stake investing and buying companies. Some managers are terrible. A hundred million dollars put in a box, put in a corporation, and handed to them is worth zero if they can't be replaced before the cash has been burnt.

The PE on S&P 500 is 18 : http://finance.yahoo.com/q?uhb=uh3_finance_vert&fr=&type=2bu...

The PE on Technology Select Sector SPDR ETF is 19 : http://finance.yahoo.com/q?uhb=uh3_finance_vert&fr=&type=2bu...

Based on this measure, tech and general market are priced similarly.

He is not buying equity in Yahoo, he is lending money to the actual buyer and will receive interest on that lending. (Which is much more secure)

Actually it sounds as if he would be buying convertible bonds according to the article. This means he will have the opportunity to convert his bonds into equity at some point in the future (at some share price in the future) if he chooses to exercise this right. Otherwise he will indeed just be collecting interest.

Yes, that is exactly the case! :)

So he is assuming Gilbert & company would be able to turn Yahoo around, churn out some cash and pay the interest? That would be very long shot given the history.

Valuations dropped enough for it to be a sensible buy. Buffet stated before that he does not understand why tech valuations are so high based on the fundamentals.

And he's quite right. Apple might be the exception because of their extensive cash reserves.

But if you look at Facebook or Twitter, it is hard to tell why they're selling for that amount.

I myself avoid index funds which over-invest in tech because I believe we're in a bubble.

How you could compare Facebook to Twitter is beyond me.

I didn't compare them, I grouped them together.

So you would group them, but not compare them to each other?

eh, the valuation on facebook I understand though. Yes, it is extremely high, but the premise is that with that much social data, that much user stickiness, and that level of talent, and you are one of very few players that look like they could seriously give google a run for their money in the advertising business. Read enough, and you start wondering if Verizon / Google / Facebook won't outright own digital advertising industry in enough time. Read some more fanciful stuff, and you start wondering if they have enough data to actually change user behavior and dictate spending streams preemptively.

I could be wrong on all of this though, I'm just a dev, not an industry expert : )

Apple has a P/E ratio of 9.82. (2015 actual). That's what a mature, profitable company looks like. AAPL isn't overvalued. That's the sort of thing Buffet buys. IBM is at 9.90.

Compare P/E (last full year numbers):

    Google:      31.12
    Facebook:    80.41   
    Salesforce: 948.63
    Twitter:    (loss)
    LinkedIn    (loss)

The Salesforce one is the best. They're off the planet.

That just means low earnings. At zero earnings, P/E goes to infinity. For losses, P/E goes negative. (Negative values aren't usually considered numerically meaningful; it's customary to just indicate a loss.)

It sounds like he's just providing financing for a Gilbert-led group of investors. I don't know enough about private equity or Warren Buffett to know if that's still significantly out of character for him

Where else can you find an outlet to spend over a $billion at once where the underlying assets are more valuable than the security that represents them? Kind of a unique and Buffet-like opportunity.

That was back in the day before he even bought IBM shares

Buffett(BRK) is financing the deal. That's different from investing

compare market cap to assets

Reply on news.ycombinator.com