OMAHA, Nebraska – Warren Buffett’s Berkshire Hathaway currently has around $152 billion in cash available, leading investors to speculate where the Oracle of Omaha might deploy this massive war chest.
While an acquisition is possible, Berkshire may also look to purchase shares in select companies if the price is right. One stock that seems poised for a potential Berkshire investment is digital payments processor PayPal Holdings Inc (NASDAQ: PYPL).
PayPal Aligns With Berkshire’s Investing Philosophy
PayPal exhibits many characteristics that Buffett and his investment managers look for when deploying Berkshire’s capital. The company operates a “tollbooth” model, taking a small percentage of every transaction on its platform.
This recurring revenue stream from a trusted brand is highly attractive to value investors like Buffett.
Berkshire already owns stakes in other fintech operators such as StoneCo as well as major credit card companies Visa, Mastercard, and American Express. PayPal would fit right in with these other financial services holdings.
And while Berkshire previously avoided tech stocks, it has warmed up to the sector in recent years as the valuation disconnect has narrowed.
PayPal Stock Price Makes it an Opportune Time to Buy
In addition to strategic fit, PayPal’s beaten down share price also makes it an opportune time for Berkshire to invest. While the broader market has recovered in 2023, PayPal stock remains depressed, down over 20% year-to-date.
The company has faced headwinds as pandemic-driven e-commerce tailwinds dissipate.
However, PayPal still grew revenue 8% and payment volume 13% last quarter on a currency neutral basis. While earnings declined, this was expected, and EPS is forecast to bounce back in Q4.
Despite continued growth, PayPal now trades at just 17x trailing earnings – a significant discount to the S&P 500’s 25x.
The company’s forward P/E of 11 is even cheaper for a business projected to grow earnings 12% next year. This rare combination of growth at a value price is appealing for bargain hunters like Buffett. PayPal also has a new CEO focused on efficiency, which could provide an additional boost to profitability.
Recent Berkshire Cash Deployments Signal More Tech Investments
While PayPal would represent Buffett’s largest tech investment to date, recent moves signal the Oracle is getting more comfortable with tech. Within the last year, Berkshire established billion-dollar stakes in HP and Activision Blizzard while adding to its Apple holding.
The HP investment at around 10x earnings highlights how Berkshire is willing to pay a reasonable multiple for quality tech companies with solid cash flow generation.
PayPal is cheaper than HP on a valuation basis and boasts a stronger competitive position with more growth opportunities ahead. This further strengthens the case for Berkshire to make an investment.
Potential Multi-Billion Dollar Investment Would Be Impactful
Given Berkshire’s $152 billion cash position, the conglomerate could deploy several billion dollars to acquire a meaningful stake in PayPal.
While Berkshire typically limits individual stock investments to less than 10% of a company, even a smaller stake would provide a nice boost to PayPal given its $90 billion market cap.
If Berkshire invested just 1% of its cash into PayPal at current prices, that would equal around $1.5 billion. For reference, Berkshire’s recent $4.2 billion Activision Blizzard purchase represented just under a 1% ownership position.
A larger investment in the $5-$10 billion range could make Berkshire one of PayPal’s largest shareholders.
Such a sizable purchase would also eat up a good chunk of Berkshire’s idle cash. While Buffett prefers to keep around $30 billion on hand for liquidity purposes, he remains eager to find attractive homes for the excess capital.
PayPal stock currently looks like a rare opportunity for value and growth at a reasonable price.
Other Possible Berkshire Cash Deployments Beyond PayPal
While PayPal is a prime candidate, Berkshire has other options beyond the digital payments firm to invest its cash hoard. Buffett and his team continue to evaluate public companies as well as private businesses to purchase outright.
Recent deals for Alleghany and Precision Castparts demonstrate Berkshire’s ability to deploy tens of billions in a single acquisition.
Within the public equity markets, Berkshire added to its Occidental Petroleum stake earlier this year and now owns 20% of the oil producer. Berkshire also previously bought shares in leading Japanese conglomerates Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Buffett sees these Asia-based companies as undervalued with strong long-term prospects.
The conglomerate may also look to increase its holdings in ‘forever stocks’ like Coca-Cola and American Express that Berkshire has held for decades.
Regardless of where Buffett and his team ultimately decide to invest the $152 billion cash pile, investors can feel confident it will be in companies with durable competitive advantages purchased at attractive valuations.