Berkshire Hathaway Looks to the Future With New Tech Holdings
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Around a week ago, I covered the news that Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) had agreed to invest $500 million in Brazilian digital bank operator Nu Pagamentos SA, aka Nubank. This was the second significant investment the conglomerate has made in the South American fintech sector in recent years. A few years before, Warren Buffett (Trades, Portfolio)'s investment conglomerate snapped up 14 million shares in Brazilian payment processor StoneCo (NASDAQ:STNE) at the company's IPO.
Due to these holdings' size (initially smaller than $1 billion), I think it's most likely one of Buffett's portfolio managers, Todd Combs or Ted Weschler, decided to pull the trigger on behalf of Berkshire. Therefore, I will refer to these as Berkshire's investments for the rest of the article, rather than assuming Buffett alone was behind the trades.
Fintech holdings
When I wrote my previous article, I speculated that the primary reason why the investment managers might be interested in these Brazilian fintech companies is their growth potential. Both organizations are rapidly diversifying their business models and targeting the millions of people across South America and Latin America that do not yet have access to financial services.
According to Nubank's CEO, the total number of consumers who do not have access to financial services in Brazil is 60 million. There are 250 million people across Latin America without access to financial services in total.
That's without considering the disruptive effect these businesses may have on the market and how that could encourage consumers who are already with existing banks to move to the new upstarts.
So there are the growth elements to consider, but there's also something else I think investors need to pay attention to, and that's the diversification these enterprises provide.
Diversification
Looking at Berkshire's giant equity portfolio, it's clear the group has a heavy concentration of financial services stocks. The largest holding in the portfolio is Apple (NASDAQ:AAPL), which accounted for around 40% of assets in the equity portfolio at the end of March. The second and third largest holdings were Bank of America (BAC) and American Express (NYSE:AXP). Together, these investments made up around 22% of the overall equity portfolio.
These companies are making heavy investments in technology, but one cannot deny that they are both legacy financial businesses. Investors who have experienced dealing with legacy financial institutions know they can be slow to move and have problems adapting to technological change.
On the other hand, Berkshire's newer fintech investments have been built from the ground up using modern technology. This may make them more appealing to users and may help them adapt faster to change.
StoneCo and NuBank are not the only examples of Berkshire's diversification into tech upstarts. Snowflake (NYSE:SNOW) is another. One could also argue that the group's investment in Verizon (NYSE:VZ) is another example of the company trying to invest more in the digital economy.
I should note that this article is entirely my own speculation. None of Berkshire's managers have said that the firm is looking to diversify by investing in younger startups, but I think it makes a lot of sense from a portfolio management perspective.
To be clear, I don't think this is a sign at all that the group could be turning its back on its existing holdings. I think these will remain core positions for decades. However, with a portfolio of securities worth $270 billion (at the end of March) as well as $145 billion of cash, Berkshire can afford to deploy a few billion dollars into high-growth investments. Doing so would allow the firm to build insights into these businesses as they grow, opening the door to further investments in the years ahead.
This article first appeared on GuruFocus.
