Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) purchase of Apple (AAPL, Financial) has been a major success. Apple's stock price has risen from $22 at the time of Berkshire's first purchase in May 2016 to around $125 today. That's an annualized gain of 42% compared to the S&P 500's 15% annual return in the same time period.
Berkshire's chairman Warren Buffett (Trades, Portfolio) once again discussed the appeal of Apple at the 2021 shareholders meeting. According to him, its wide economic moat, strong management team and low capital requirements continue to mark it out as an attractive business.
A wide economic moat
Buffett's optimism about Apple's prospects is partly due to its wide economic moat. It has an extremely loyal customer base that may be less price conscious than those of its rivals. This may allow the company to enjoy higher sales and margins over the long run, while further expanding into complementary product areas such as services and TV.
Buffett stated the following during Berkshire's 2021 annual meeting when discussing Apple's products and customers:
"(It's) a product that people absolutely love. And there's an installed base of people and they get satisfaction rates of 99%... If they want an Apple phone, you can't sell them the other way. The brand and the product, it's an incredible product. It's a huge bargain to people. I mean, the part it plays in their lives is huge."
Low capital requirements
Apple has relatively modest fixed asset requirements. This makes it an attractive business because it requires less capital to be reinvested each year compared to other companies. Asset-light businesses also produce higher returns on capital that could lead to richer stock market valuations in the long run.
Buffett stated the following in the 2021 shareholders meeting when discussing Apple's limited amount of fixed assets:
"Apple has $37 billion in property, plant, equipment. Berkshire has $170 billion or something like that, and they're going to make a lot more money than we do. They're in better business. It's a much better business than we have."
Competent management
Buffett also highlighted the quality of Apple's management at Berkshire's annual meeting, noting, "Apple, it's got a fantastic manager. Tim Cook was under appreciated for a while. He's one of the best managers in the world, and I've seen a lot of managers."
This point is sometimes overlooked by investors. In my view, Steve Jobs did a superb job in developing the company's product range. However, Tim Cook has enjoyed significant success in broadening the company's range of products and services. Buffett, it seems, is optimistic about Cook's potential to further enhance the firm's financial performance.
Valuation considerations
In my opinion, Buffett's comments about Apple are consistent with his long-term investment approach. He has a long track record of seeking companies that have low capital requirements, strong management teams and wide economic moats.
Interestingly, he went on to comment on the company's current valuation at Berkshire's annual meeting. When asked whether he thought tech stocks such as Apple are trading at "crazy valuations," Buffett stated, "we don't think they're crazy."
This highlights that Buffett remains optimistic about the potential for Apple to deliver high returns in the long run from its current price level. It also shows that he remains content to pay what he deems to be a fair price for companies based on their quality.
As such, even though the investing environment has changed dramatically in the five years since first purchasing Apple shares, the Oracle of Omaha appears to be using the exact same investment methodology to apportion Berkshire's capital.
Disclosure: The author has no position in any stocks mentioned.
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