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Geoff Gannon
Geoff Gannon
Articles (283) 

What Does Warren Buffett See in Apple?

Warren Buffett's investment in Apple is a lot like his investment in IBM. Buffett is investing billions in a huge company he feels certain will have higher EPS in 5 to 10 years

Comments

crafool
Crafool premium member - 6 months ago

I think what most people should do with Buffett's purchase of AAPL is file it in the same pile of his purchases of Exxon a few years ago. By that what I mean is that he isn't overly interested in the company.

You see Buffett has a high class problem. Berkshire generates cash by the truck load, and he stock piles it for his "elephant gun", but unfortunately the ammunition for the elephant gun doesn't earn much when you think about t-bill yields today. Buffett is noted in the past for his concern on bonds especially now that the Fed is raising rates and that will negatively impact government bonds.

Buffett broke all the rules when he took the route of not reinvesting money back into the same company it was generated, but rather wherever he could earn the highest return on it as he is a capital allocator.

T-Bill? Exxon Stock, Now, Apple stock! Buffett is using Aapl as part of his cash management rather than t-bills. Why not, it has a dividend yield greater than t-bills, share buybacks to provide some share stability, an enormous cash hoard to elevate any credit concerns and is sufficiently large enough to provide plenty of liquidity should he need to cash out and use the cash for another purchase.

so Aapl is his latest money market!

Sivaram
Sivaram - 6 months ago    Report SPAM
Crafool,

What you are saying is true and that's one reason I don't really pay much attention to Warren Buffett (Trades, Portfolio) anymore, but the question is still, why Apple and not something else? If it was all about just parking cash, there are numerous other companies out there (including some consumer goods companies that Buffett is an expert on).

So the question is still, why Apple?



Sivaram
Sivaram - 6 months ago    Report SPAM

I think Gannon does a good job explaining the types of investments Buffett would look and why he is limited to companies with certain characteristics (like size, capital allocation, etc). Gannon does a good job explaning, sort of the, first aspect: narrowing down of the investment choices.

I think the second aspect of why Apple and not something else, is the mystery to me and many others out there. Apple is kind of attractive if you think about how much cash it has and the high likelihood of it returning it to shareholders within two years once the Trump administration does something with the foreign tax (likely to happen this year in my opinion). But the part that is difficult for me is, how could anyone have any confidence that Apple will maintain its position in a decade, let alone 5 years?

The insight that's hard to determine, and probably what Buffett spent the most time on, is the evaluation of Apple's moat and its business. How can one be sure this isn't Sony from the 1990's (which was totally dominant in television, music stereos, CD players, etc)?

joel.schopp
Joel.schopp - 4 months ago    Report SPAM

I recently owned Apple stock and then sold it for a ~50% gain. I bought it because I like to keep my positions around 20 at 5% each and I didn't have 20 good ideas. Apple seemed like a safe place to park some money. I bet Warren has a similar idea, park some money in Apple.

Apple's earnings look unstable, but they aren't actually unstable, they just have unstable timing. The total number of monthly active devices continues to grow for iOS (iPhone). The number of people who switch from iPhone to Android or vice versa is quite small, retention on a platform is incredibly high. So the real question for Apple is when will people upgrade their phone? Phone upgrades are still very lumpy. A particularly compelling feature on a new phone may have people upgrade earlier, a ho-hum phone may have some people put off an upgrade. Then 2 years after a big wave of upgrades you get an echo wave of upgrades. But even if people skip uprading at 2 years they will eventually upgrade. Either because their phone dies (battery issues, broken screen, dropped in water, stolen, etc) or because of technological obselence. So some people upgrade every year, most people every two years, some people might upgrade every 3 or 4 years. But hardly anybody is switching or not uprading ever.

The neat trick Apple is doing now is starting to make more subscription services profits from existing iphones. Apple is making more money from the Apple store selling apps, from iTunes, from iCloud, Apple maps, etc. This income is incredibly steady and predictable. It also has the advantage of decreasing platform turnover. For every new service you use that is exclusivly on Apple platforms you are that much more likely to not switch to Android.

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GuruFocus has detected 8 Warning Signs with Apple Inc $AAPL.
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