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With Bill Gates Quitting Microsoft, Is It Time for Warren Buffett to Pounce?

Last Updated September 23, 2020 1:39 PM
Mark Emem
Last Updated September 23, 2020 1:39 PM
  • Warren Buffett let a friendship get in the way of an investment.
  • Bill Gates is no longer a Microsoft director. He quit the board of Berkshire Hathaway too.
  • It would be ridiculous to suggest that Buffett would have a conflict of interest now.

Warren Buffett has never hidden his admiration for Microsoft (NASDAQ:MSFT). Two years ago, the Oracle of Omaha revealed that “stupidity” was to blame for not investing in the world’s largest software maker.

The Berkshire Hathaway (NYSE:BRK.A) CEO additionally worried that his decades-long friendship with Bill Gates would lead to perceptions of conflict of interest .

Now, Buffett can no longer make this argument as Gates recently resigned his board position  at Microsoft. Gates stepped down from the board of Berkshire Hathaway too.

With all the obstacles to investing in Microsoft eliminated, will Buffett make a move now?

What Warren Buffett thinks of Microsoft

Buffett was first publicly urged to invest in Microsoft in 1997. He agreed that Microsoft was an attractive potential buy even then.

Take this email reply to a Microsoft insider  as proof:

Your analysis of Microsoft, why I should invest in it, and why I don’t could not be more on the money. In effect the company has a royalty on a communication stream that can do nothing but grow.

Warren Buffett
Warren Buffett saw Microsoft’s potential more than two decades ago. | Source: Tilson Funds 

Buffett skipped the chance to invest though. At the time, he had an aversion to tech stocks; his first major investment in the sector  (IBM) was to come nearly one and a half decades later.

Is Microsoft an attractive buy for Berkshire Hathaway?

With Warren Buffett no longer averse to tech stocks, Microsoft would be a perfect addition to his current stakes in Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).

Microsoft is a leader in productivity software and has a significant market share in cloud computing through Azure. Consequently, Microsoft stands to benefit greatly as the shift to cloud computing intensifies.

In his most recent letter to shareholders , Warren Buffett identified the criteria he applies before investing in a business:

First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.

Cloud-first approach pays off

Microsoft meets Buffett’s criteria almost perfectly. Its return on invested capital is around 23 . This is better than Amazon but a bit lower than Apple.

On leadership, the Redmond giant boasts an able team led by CEO Satya Nadella. The Microsoft veteran has weaned the company off its over-reliance on legacy software by taking a cloud-first approach.

Source: Twitter 

In the process, Nadella has enhanced shareholder value. Since becoming CEO in 2014, Microsoft’s share price has rocketed by over 300%.

Coronavirus brings MSFT within buying reach

Microsoft’s stock is attractive following the nearly month-long market crash triggered by coronavirus.

The stock is currently about 25% off its record highs.

MSFT has fallen by 25% since its February record high. | Source: TradingView

Microsoft’s consensus rating is a ‘Buy’, based on 34 Wall Street analysts covering the stock. None has issued a ‘Sell’ rating.

Berkshire Hathaway
No ‘Sell’ rating has been issued by any of the 34 analysts covering Microsoft. | Source: WSJ 

The software giant had over $134 billion cash on hand  by the end of last year. It additionally enjoys a triple-A credit rating, which allows it issue low-interest debt should the need arise.

There is nothing to dissuade Warren Buffett from investing in Microsoft now.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.