Tim Cook and Warren Buffett
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Berkshire HathawayWarren Buffett is still using a flip phone 2020 at the latestfour years after his investment giant began amassing a huge stake in the iPhone maker.
“I don’t understand anything about phones, but I understand consumer behavior,” Buffett said at Berkshire’s annual shareholder meeting in Omaha, Nebraska, last year.
He emerged in recent years as one of the Apple leading missionaries.
At the end of 2023, Berkshire owned about 6% of Apple, a stake worth $174 billion at the time, or about 40% of the corporation’s total value. That’s about four times larger than Berkshire’s second-largest public stock holding. Bank of Americaand made the company Apple’s second largest shareholder, only behind Vanguard.
When Berkshire investors and fans of the 93-year-old Buffett flock to Omaha this weekend for the 2024 annual meeting, Apple is likely to be a hot topic of discussion. Tech giant on Thursday reported iPhone sales decreased 10% year-over-year, leading to a 4% decrease in total revenue. But the stock has it best day from the end of 2022 on Friday largely due to a $110 billion stock buyback plan and profits increase as a result of the growing service business.
Bet on Apple and the CEO Tim Cook has rewarded Buffett, who said in 2022 that the price of Berkshire’s Apple shares was only 31 billion USD. His company has increased its investments by nearly 620% since the beginning of 2016.
Although he calls himself a Luddite, Buffett has long held a coherent non-technological view of his love for Apple. He saw how dedicated Apple users were to their devices and saw the iPhone as a special product that could keep customers spending within the Apple ecosystem. He calls it the moat, one of his favorite words to describe his favorite business.
“Apple has a position with consumers that they are paying $1,500 or whatever for a phone, and these people are also paying $35,000 for a second car,” Buffett speak at last year’s meeting. “And if they have to give up their second car or give up their iPhone, they give up their second car!”
The data is in his favor. According to a study from Consumer Intelligence Research Partners, Apple benefits from 94% customer loyalty, meaning 9/10 current iPhone owners in the US would choose another iPhone when purchasing a new device.
Buffett also praised Apple’s ability to return billions of dollars to shareholders annually through stock buybacks and dividends, a capital allocation strategy for which the billionaire investor can be thankful. . When Apple’s CEO was asked in a Interviewed in 2016 to The Washington Post, to whom he turns for advice at critical moments, Cook told a story about his relationship with Buffett.
“When I was going through [the question of] What should we do about returning cash to shareholders, I think who can really give us useful advice here? Who is not prejudiced?” Cook said. “So I called Warren Buffett. I think he’s a 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 newsboy rides his bicycle from Omaha to Apple’s hometown of Cupertino, California.
But with Apple’s business having shrunk in size in five of the past six quarters, and with the company expected to grow in the single digits in the current quarter, Buffett may face a question. asked this weekend at a shareholder meeting about whether he still sees the same strength in the moat, especially with regulatory pressure increasing around large-cap companies in the technology sector. .
Buffett cuts his stake in Apple last year, although only about 1%. Even after Friday’s rally, the stock is down 3.8% in 2024, while the S&P 500 is up 7.5%.
‘Very, very, very locked down’
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 shares and Buffett started bringing up the issue. He said he likes the company’s stock and “sticky” product, even though he doesn’t use it.
In 2018, he said Apple users are “very, very tied, at least psychologically and spiritually” to the product and ecosystem.
“Apple has a special franchise for consumers,” he said.
In previous years at the annual meeting, when asked how Berkshire could defend Apple making up the bulk of its public portfolio, Buffett said: “It just happens to be a better business than any other.” we own.” He also praised Cook, calling him one of the “world’s best managers”.
The number Apple likes to use to tout its business performance, despite falling revenue, is “$2.2 billion.” That’s the number of devices the company says is currently in use and points to the huge customer base available as Apple rolls out new subscription services.
“Once customers are in the ecosystem, they don’t leave,” said Dan Eye, chief investment officer at Fort Pitt Capital Group, which owns Apple stock. So this is not a speculative technology play.” “It’s more like an annuity and I think that’s what Warren Buffett really sees as well.”
In addition to falling revenue, Apple also faces new challenges from weak regulations and foreign markets, as well as from Microsoft And by Google advances in artificial intelligence. For regulators, the main surrounding concern Moat water that Buffett finds so attractive and whether it gives the company monopoly control over the smartphone market remains to be seen.
US government in March accused that Apple designs its business to retain customers. The Justice Department lawsuit claims that products like the Apple Card, Apple Arcade game subscriptions, iMessage, and the Apple Watch work best or only with the iPhone, creating illegal barriers to competition and causing competition becomes more difficult for consumers to switch when it’s time to upgrade.
However, the litigation is expected to drag on for years, leaving Apple and its products exposed to any future penalties. Meanwhile, there’s no sign that the iPhone is becoming any less important as new devices like virtual reality headsets find only niche audiences, while consumer AI products fail to take off. wing.
Buffett has yet to publicly express his views on Apple’s regulatory hurdles, and this will be the first opportunity for investors to ask him about the issue 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 note to clients earlier this month, Bernstein analyst Toni Sacconaghi did not delve into regulatory concerns, but mentioned that he did not believe the DOJ lawsuit would “seriously threaten” the power of the Apple ecosystem.. He also said that following Buffett’s advice on joining and leaving 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 position in Apple when it is relatively cheap and cutting back when it is relatively expensive,” Sacconaghi wrote. ”. He encouraged investors to “be like Buffett.”
More money back
Oddly enough, Buffett was delighted with Apple’s announcement this week of its expanded buyback program. It’s a habit he’s long enjoyed.
“When I bought Apple, I knew that Apple was going to buy back a lot of shares,” he said in 2018.
And he wanted to note the buyback resulted in a larger stake in the company without needing to buy more shares.
Buffett: “Repurchasing happens slowly but can have powerful effects over time.” said in 2021.
Apple also increased its dividend by 4% and signaled that it will continue to increase its dividend every year.
Buffett was enthusiastic about the tech giant’s return on capital strategy at the company’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 his company wholly owns, Berkshire can continue to grow its stake in Apple, a fact he reminded investors about. private at the meeting.
“The good thing about Apple is we can go up,” Buffett said.
