(GuruFocus) At the end of March, Warren Buffett spoke at the GateHouse Hands Up for Success Summit. He covered many topics, including the upcoming Lyft IPO, which he unsurprisingly avoided. But his comments on the company are interesting because they can teach us a lot about his investing style.
When he was asked what he thought of the company, Buffett replied, "I think the range they are talking about is $25 billion and I certainly wouldn't buy a business for $25 billion."
He went on to say the reason why he wouldn't spend $25 billion to acquire Lyft is that there are so many other things "you can buy for $25 billion in this world."
Buffett then said that whenever he evaluates a company, he always looks at it from the perspective of an acquirer. To put it another way, whenever he values a stock, he approaches it as if he is planning to acquire the whole business.
The Oracle of Omaha has spoken about this process several times before. For Buffett, buying a stock is just the same as buying a business; the sums involved are just much smaller.
With this being the case, whenever he approaches a stock, he always considers whether or not he would be willing to buy the entire business at the current market value. If not, then he won't buy a single share because there is no difference between shares and the company as a whole in his mind.
No profits
In addition to the company looking expensive, Buffett noted Lyft is not currently profitable.
He calculated that the business will have to be earning around "$2 billion in two to three years pre-tax" to justify its current valuation. As no one can tell whether or not the company will actually be able to meet this objective in the timeframe given, it is impossible to say if this target is achievable.
Buffett might have been thinking about Aesop's advice from 2,500 years ago when he made this comment: "A bird in the hand is worth two in the bush."
So, that's why he is not willing to spend $25 billion to acquire Lyft. Even though the company might claim to be growing rapidly with a long runway for growth in front of it, there are plenty of other companies around at the moment that are already profitable and generating returns for shareholders. Avoiding these companies in favor of an unprofitable business with an uncertain future does not seem like a good trade-off.
Simple is best
This might seem like a relatively simple way to evaluate a company and throw it into the "too hard pile," but that is precisely why Buffett has developed his investment strategy the way he has over the past seven decades.
He believes that there is no point in spending too much time trying to evaluate a company if the value is not immediately apparent. If you cannot immediately see that the stock or company is undervalued significantly, and you need a spreadsheet to try and work out how much the business might be worth in three or four years time, then it might be best to overlook the opportunity.
After all, the more time you spend trying to calculate how much a business is worth, the higher the chances are of making a mistake in your investment thesis.
This is not to say Buffett will never invest in the ride-sharing company. If it does end up turning a profit in the next few years, then if the stock drops to an attractive valuation, we could see the Berkshire Hathaway chairman make a move, but only at the right price.
