Apple is Buffett's biggest stock, but his moat thesis raises questions

Berkshire HathawayWarren Buffett was still using a flip phone in 2020, 4 years after his investment giant began buying an enormous stake within the iPhone-making company.

“I don’t understand the phone at all, but I understand consumer behavior,” Buffett said last 12 months at Berkshire’s annual shareholder meeting in Omaha, Nebraska.

He has stood out as considered one of them lately Apples Top evangelists.

At the top of 2023, Berkshire owned about 6% of Apple, a stake then price $174 billion, or about 40% of the conglomerate's total value. That's about 4 times larger than Berkshire's second-largest public stock holding. Bank of Americamaking the corporate Apple's second-largest 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 is prone to be a hot topic of debate. The tech giant reported a ten% year-over-year decline in iPhone sales on Thursday, resulting in a 4% decline in overall revenue. But the stock had its best day since late 2022 on Friday, largely as a consequence of a $110 billion share buyback plan and better margins resulting from a growing services business.

The bet on Apple and CEO Tim Cook has paid off handsomely for Buffett, who said in 2022 that the fee of Berkshire's Apple stake was just $31 billion. His company has increased its investments by almost 620% for the reason that starting of 2016.

Although he calls himself a Luddist, Buffett has long had a coherent non-tech thesis as to why he loves Apple. He has seen how dedicated Apple users are to their devices and saw the iPhone as an exceptional product that might keep his customers' spending inside the Apple ecosystem. He calls it “Moat,” considered one of his favorite words to explain his favorite businesses.

“Apple's position with consumers is 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 said ultimately 12 months's meeting. “And if they had to give up their second car or their iPhone, they would give up their second car!”

The data speaks for him. According to a study by Consumer Intelligence Research Partners, Apple enjoys 94% customer loyalty, meaning nine out of 10 current iPhone owners within the US will select one other iPhone when purchasing a brand new device.

Buffett has also praised Apple's ability to return billions of dollars annually to shareholders through stock buybacks and dividends – a capital allocation strategy the billionaire investor could have himself to thank for. 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 went through [the question of] What should we do to return cash to shareholders? I thought, who could give us some really good advice here? Who wouldn’t be biased,” Cook said. “So I called Warren Buffett. I thought he was the natural person.

Apple has expressed its appreciation for the Oracle of Omaha in other ways.

In 2019, the company released an original iPhone game called “Warren Buffett's Paper Wizard,” in which a paperboy rides a bicycle from Omaha to Apple's hometown of Cupertino, California.

But with Apple's business declining in five of the last six quarters and the company only expecting low single-digit growth for the current quarter, Buffett could face questions at this weekend's shareholder meeting about whether he's still the same The moat sees power in this, especially given the increasing regulatory pressure surrounding mega-cap companies in the technology sector.

Buffett reduced his stake in Apple late last year, but 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 initial entry into Apple in 2016 was not Buffett's idea. Rather, the investment was led by Ted Weschler, considered one of his top deputies, and was seen as a passing of the torch to the following generation of Berkshire investment managers.

But the following 12 months, Berkshire began buying much more Apple shares, and Buffett began talking about it. He said he liked the stock and the corporate's “sticky” product, despite the fact that he didn't use it.

In 2018, he said Apple users were “very, very, very attached to the product and the ecosystem, at least psychologically and mentally.”

“Apple has an exceptional consumer franchise,” he said.

At last years When Buffett was asked at his annual meeting how Berkshire can defend Apple making up such a big a part of its public portfolio, he said, “It's simply a better company than any other we own.” He also praised Cook and named him considered one of the “best managers in the world”.

One number Apple likes to make use of to tout its company's health despite declining revenue is “2.2 billion.” The company says that many devices are currently in use, pointing to the large customer base available as Apple launches recent subscription services.

“Once customers enter the ecosystem, they never leave. So it’s not a speculative tech play,” said Dan Eye, chief investment officer at Fort Pitt Capital Group, which owns Apple shares. “It's more like a pension, and I think Warren Buffett really sees that too.”

In addition to the decline in sales, Apple faces recent challenges from regulations and weak overseas markets Microsoft And Googles Advances in artificial intelligence. For regulators, the priority is with the actual issue dig what Buffett finds so attractive and whether it gives the corporate monopolistic control of the smartphone market.

The U.S. government claimed in March that Apple was basing its business on retaining customers. The Justice Department's lawsuit alleged that products like Apple Card, the Apple Arcade game subscription, iMessage and Apple Watch work best or only with an iPhone, creating illegal barriers to competitive advantage and making it harder for consumers to modify when it's time for one Upgrade is.

However, the legal battle is predicted to last years, pushing possible penalties for Apple and its products well into the longer term. Meanwhile, there's no sign of the iPhone becoming less relevant, as recent devices like virtual reality glasses have found only area of interest audiences while consumer AI products have did not take off.

Buffett has not publicly expressed his opinion on Apple's regulatory hurdles, and this can be the primary opportunity for investors to query him on the topic for the reason that DOJ lawsuit. But Buffett knows a little bit about regulation – two markets through which he’s most energetic are railroads and insurance.

In a note to clients earlier this month, Bernstein analyst Toni Sacconaghi didn’t elaborate on regulatory concerns, but mentioned that he doesn’t consider the Justice Department's lawsuit will “seriously threaten” the strength of the Apple ecosystem. He also said that following Buffett's lead when entering and exiting Apple was a sound technique to generate income.

“Despite his reputation as a long-term buy-and-hold investor, Warren Buffett was remarkably disciplined in adding to his Apple position when it was relatively cheap and reducing it when it was relatively expensive,” Sacconaghi wrote. He encouraged investors to “be like Buffett.”

Chances are, Buffett was enthusiastic about Apple's announcement of its expanded buyback program this week. It's a practice he's loved for a very long time.

“If I buy Apple, I know Apple will buy back a lot of shares,” he said in 2018.

And he likes to notice how buybacks end in a bigger stake in the corporate without having to purchase more shares.

“The math of buybacks is slow, but can be powerful over time,” Buffett says said in 2021.

Apple also increased its dividend by 4% and said it could proceed to extend it annually.

Buffett was effusive concerning the tech giant's capital return strategy at the corporate's annual meeting last 12 months, noting that it had helped Berkshire own a much bigger piece of the pie. Unlike insurance company Geico and residential builder Clayton Homes, through which his firm has a full stake, Berkshire can proceed to extend its stake in Apple, a fact he reminded investors of on the meeting.

“The good thing about Apple is that we can go up,” Buffett said.