Tim Cook and Warren Buffett
Getty Images (L) | CNBC(R)
He has emerged as one of Apple’s top evangelists in recent years.
At the end of 2023, Berkshire owned about 6% of Apple, a stake worth $174 billion at the time, or about 40% of the conglomerate’s total value. That’s about four times larger than Berkshire’s second-largest public holdings, Bank of America, and makes the company the second-largest Apple shareholder, behind only Vanguard.
As Berkshire investors and fanboys of the 93-year-old Buffett flood Omaha this weekend for the 2024 annual meeting, Apple will likely be a hot topic of discussion. The tech giant reported a 10% year-over-year decline in iPhone sales on Thursday, leading to a 4% drop in overall revenue. But the stock had its best day since late 2022 on Friday, largely due to a $110 billion stock buyback plan and higher margins from a growing services business.
The bet on Apple and CEO Tim Cook has paid off well for Buffett, who said in 2022 that the cost of Berkshire’s stake in Apple was just $31 billion. His company has increased its investments by almost 620% since the beginning of 2016.
Despite calling himself a Luddite, Buffett has long had a coherent, non-techie thesis about his love for Apple. He has seen how dedicated Apple users are to their devices, and has seen the iPhone as an extraordinary product that could keep his customers’ spending within the Apple ecosystem. He calls it a moat, one of his favorite words to describe his favorite businesses.
“Apple has the position with consumers that they’ll pay $1,500 or whatever for a phone, and the same people will pay $35,000 for a second car,” Buffett said at last year’s meeting. “And if they had to give up their second car or their iPhone, they would give up their second car!”
Data is in his favor. According to a study by Consumer Intelligence Research Partners, Apple enjoys a 94% customer loyalty rate, meaning nine out of ten current iPhone owners in the US will choose a different iPhone when purchasing a new device.
Buffett has also praised Apple’s ability to return billions of dollars annually to shareholders through share buybacks and dividends, a capital allocation strategy that the billionaire investor may have himself to blame. When the Apple CEO was asked in a 2016 interview with The Washington Post who he turns to for advice at crucial moments, Cook told a story about his relationship with Buffett.
‘When I continued [the question of] What should we do if we return cash to shareholders, I thought, who could really give us good advice here? Who wouldn’t have a prejudice?’ Cook said. “So I called Warren Buffett. I thought he was the natural.”
Apple has shown its appreciation for the Oracle of Omaha in other ways.
In 2019, the company published an original iPhone game called “Warren Buffett’s Paper Wizard,” in which a paperboy cycles from Omaha to Apple’s hometown of Cupertino, California.
But with Apple’s business shrinking in five of the past six quarters and the company only projecting low-single-digit growth in the current quarter, Buffett could face questions at this weekend’s shareholder meeting about whether he’s still the same. power sees in the current quarter. the moat, especially as regulatory pressure mounts around the tech sector’s mega-cap companies.
Buffett reduced his stake in Apple late last year, albeit only by about 1%. Even after Friday’s rally, the stock is down 3.8% in 2024, while the S&P 500 is up 7.5%.
Berkshire’s first foray into Apple in 2016 wasn’t Buffett’s idea. Rather, the investment was led by Ted Weschler, one of his top deputies, and was seen as a passing of the torch to Berkshire’s next generation of investment managers.
But the next year, Berkshire started buying even more Apple stock, and Buffett started talking about it. He said he liked the company’s stock and “sticky” product, even though he didn’t use it.
In 2018, he said that Apple users are “very, very, very locked in, at least psychologically and mentally” to the product and ecosystem.
“Apple has an extraordinary consumer franchise,” he said.
At last year’s annual meeting, when asked how Berkshire can defend Apple being such a large part of its public portfolio, Buffett said, “It just happens to be a better company than any company we own.” He also praised Cook, calling him one of the “best managers in the world.”
A number that Apple likes to use to tout the health of its business, despite declining sales, is “2.2 billion.” That’s the number of devices the company says are currently in use and highlights the massive customer base available as Apple rolls out new subscription services.
“Once customers get into the ecosystem, they don’t leave, so it’s not a speculative technology play,” said Dan Eye, chief investment officer at Fort Pitt Capital Group, which owns Apple stock. “It’s more like an annuity and I think Warren Buffett really sees that.”
In addition to the revenue decline, Apple faces new challenges from regulations and weak overseas markets, as well as Microsoft and Google’s advances in artificial intelligence. For regulators, the concern centers on the moat that Buffett finds so attractive, and whether it gives the company monopolistic control of the smartphone market.
The US government alleged in March that Apple designs its operations to keep customers locked in. The Justice Department lawsuit alleged that products like Apple Card, the Apple Arcade gaming subscription, iMessage and Apple Watch work best or only with an iPhone, creating illegal barriers. competition and makes it harder for consumers to switch when it’s time for an upgrade.
However, the lawsuit is expected to last years, meaning potential fines for Apple and its products well into the future. In the meantime, there are no signs of the iPhone becoming less important, as new devices like virtual reality glasses have found only a niche audience, while consumer AI products have failed to take off.
Buffett has not publicly expressed his views on Apple’s regulatory hurdles, and this will be the first opportunity for investors to ask him about the matter since the DOJ lawsuit. But Buffett knows a thing or two about regulation: the two markets in which he is most active are railroads and insurance.
In a letter to clients earlier this month, Bernstein analyst Toni Sacconaghi did not elaborate on the regulatory concerns but said he does not believe the DOJ lawsuit will “seriously threaten” the strength of Apple’s ecosystem.. He also said that following Buffett’s lead in getting in and out of Apple is a solid money-making strategy.
“Despite his reputation as a long-term buy-and-hold investor, Warren Buffett has been remarkably disciplined in increasing his Apple position when it is relatively cheap and cutting back when it is relatively expensive,” Sacconaghi wrote . He encouraged investors to “be like Buffett.”
Chances are, Buffett was pleased with Apple’s announcement this week about its expanded buyback program. It’s a practice he’s long loved.
“If I buy Apple, I know Apple is going to buy back a lot of stock,” he said in 2018.
And he likes to note how buybacks result in acquiring a larger stake in the company without buying more shares.
“The math of buybacks fades away, but can be powerful over time,” Buffett said in 2021.
Apple also increased its dividend by 4% and indicated it would continue to increase it annually.
Buffett was effusive about the tech giant’s capital return strategy at the conglomerate’s annual meeting last year, pointing out that it gave Berkshire a bigger slice of the pie. Unlike insurance company Geico and homebuilder Clayton Homes, which wholly owns its company, Berkshire can continue to grow its stake in Apple, a fact he reminded investors at the meeting.
“The good thing about Apple is we can go up,” Buffett said.
Leave a Reply