As one of the most successful investors of all time, Warren Buffett's approach to picking stocks is worth understanding. By focusing on buying shares of companies with enduring competitive advantages, defensible market shares, and low overhead costs, his ultra-long-term buy-and-hold strategy made billions.
But, Buffett's trademark methodology seems to exclude some of the most compelling companies of 2021, like the coronavirus vaccine maker Moderna (MRNA +6.23%). Is it possible that the Oracle of Omaha might actually appreciate the biotech upon close inspection?
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Buffett probably wouldn't bite
There are a handful of deal breakers with Moderna as far as Warren Buffett might be concerned.
First, it doesn't have an economic moat to defend its business, and Buffett is a zealot for moats. Moderna develops medicines, just like most of the other companies in the biopharma sector. While the company has plenty of valuable intellectual property (IP) to ensure that competitors can't directly copy its products, it doesn't stop them from targeting the same disease markets. As a result, Moderna's market share will be perpetually hard to defend unless its medicines are significantly cheaper or much more effective than the competition.
For example, in the coronavirus vaccine market, there are already a handful of competitors vying for market share, potentially with many more to come. In some of the most likely markets to be entered in the biotech's future, like the market for seasonal influenza vaccines, the same will be true. For the moment, the company's coronavirus vaccine is more effective than some of the existing competition, but there isn't anything keeping the situation that way. If other businesses invest in making new and better versions of their jabs, it's possible that they could turn the tables on Moderna over the next couple of years.
That raises another problem: expenses. In the last 12 months, it spent $1.65 billion on research and development (R&D), which accounted for more than 60% of its $2.73 billion in trailing revenue. Buffett tends to prefer companies that maintain low costs relative to their revenue. He also approves of companies that don't need to continuously spend a lot on product development to stay competitive, which is more or less the opposite of Moderna.
What's more, despite its success with the coronavirus vaccine, Moderna doesn't necessarily have any unique competitive advantages in the drug development process. It's true that the company was among the first to move a coronavirus candidate into clinical trials, but that didn't stop Pfizer from getting emergency regulatory approval for its candidate first. And while its vaccine is quite effective against the coronavirus, it remains to be seen whether the mRNA technology will be as impressive in the context of other infectious diseases.
Don't expect the fundamental issues to change
So far, there's not much reason to believe that Moderna is a Buffett stock. But, there might be one point in its favor in the future. To Buffett, businesses that can report earnings growth at a moderate pace over the long term are highly desirable.
If the coronavirus becomes endemic and the company decides to make a seasonal vaccine to protect people, it just might give Moderna the revenue and earnings consistency that Buffett craves. And, if its plans for other projects like its seasonal influenza campaign come to fruition, it would be able to add to its base of revenue. With recurring income from routine vaccinations, the company could also invest more in its therapeutics projects, which might be even more lucrative in the long term.
Still, all of that assumes quite a lot about the course of the pandemic, the duration of the immunity derived from its shots, and its ability to squeeze more and more money out of a world market that could eventually become saturated with competitors. And Buffett isn't necessarily the trusting type when it comes to future revenue projections, so the company might need to demonstrate its ability to grow consistently for several years before attracting his attention.
In sum, it's hard to believe that Buffett would ever find Moderna to be worth an investment. Of course, that doesn't mean it's a bad stock to buy, just that it doesn't fit into the traditional value investing rubric.
