As you might expect of Bill Gates’ portfolio, Microsoft makes up the lion’s share of the holdings. A full 26.9% of his $33.9 billion equity portfolio is held in Microsoft stock.
A close second is Berkshire Hathaway, which represents 23.3% of his portfolio. That too doesn’t come as much of a surprise given his long-held relationship with Warren Buffett and his advocacy for value investing.
Perhaps the next two biggest positions are eyebrow-raisers: Canadian National Railway Company in which he has $5.9 Billion invested, and Waste Management, which has a similar amount, $5.6 Billion.
We decided to run the numbers on his entire portfolio, calculating where fair value sat and identifying which stock was his most undervalued holdings, and the results were surprising.
- Microsoft makes up the lion’s share of Bill Gates’ portfolio, with 26.9% of his $33.9 billion equity portfolio invested in the company, followed by Berkshire Hathaway at 23.3%.
- Canadian National Railway Company and Waste Management are the next two biggest positions in his portfolio, each with around $5.6-5.9 billion invested.
- Vroom, a free online platform for buying and selling used vehicles, was the most undervalued stock in Gates’ portfolio, with an astonishing 73% upside potential.
Bill Gates Most Undervalued Stock
After calculating discounted cash flow forecasts on Bill Gates’ portfolio, one stock ranked head and shoulders above all the others from a valuation perspective: Vroom.
Vroom is a free online platform that offers tools for buying and selling used vehicles. It provides users with features such as vehicle history reports, vehicle inspections, and secure payment options to make the buying and selling process easier and safer.
What we uncovered from digging into the financials was that Vroom had an astonishing 73% upside potential. But as we’ll discover there’s more to the fair value calculation than meets the eye at first glance.
In 2021, the growth numbers looked impressive. Year over year revenue growth for the four quarters were 57.3%, 201%, 177.6%, and 130.3%. Even the first quarter of FY 2022 was sky high at 56.3%. The problem lies in what came thereafter. Revenue declines in the two subsequent fiscal quarters were scary: -37.6% and -62%.
Sure, Vroom’s position in the market is competitive, with a number of other online used car sales platforms such as Carvana, Shift, and CarGurus operating in the same space. But while Vroom has shown significant growth and success since its founding in 2013, it remains to be seen whether it will continue to dominate the market or face increased competition.
The revenue declines have not help the trend of negative EBIT for 20 quarters straight. And that in turn has hurt the balance sheet liquidity. Cash has fallen from $1.16 billion Q3 2020 to just $509 million in the most recent quarter. Worst still, in that same period, debt has risen from $264 million to $1.17 billion.
What does this all mean?
Cigar Butt Investing
While Vroom came top of Bill Gates’ portfolio from a valuation perspective, intrinsic value is just one metric to consider.
It took years for Warren Buffett to come to the realization that buying cheap stocks of good companies created less value than buying great companies at fair values. He described the former as akin to taking a few final puffs of a cigar butt. Sure there’s some smoke left but not a great deal of upside to be had. Instead, it’s better to buy great companies at fair prices.
Vroom has all the hallmarks of an undervalued company but debt is growing, revenues are declining, and operating income is falling. The business model is in jeopardy, and it’s a good case study in paying close attention to the investing wisdom Buffett espoused: better to buy great companies at fair prices than good companies on sale.
It’s very possible Vroom turns out to be a big winner but equally it could prove to be a cigar butt of a stock. Management will have the work cut out for themselves to turn the tide back in its favor.
A final note is that it appears Bill Gates discovered for himself how unattractive this company is… while it’s his most undervalued holdings, it now represents just 0.01% of his portfolio. Clearly a vote of no confidence!