Berkshire Hathaway’s Apple Inc. Investment Might Soon Look Better

  • Last month, legendary investor Warren Buffett’s Berkshire Hathaway surprised everyone by buying ~1Bn worth of Apple stock.
  • But Berkshire Hathaway was able to nab one of the most profitable technology companies at a great price.
  • Apple could use the upcoming WWDC to announce its next leg of major growth drivers.

Last month, legendary investor Warren Buffett’s Berkshire Hathaway Inc (NYSE:BRK.A) (NYSE:BRK.B) surprised everyone when it bought 9.8 million shares of iPhone maker Apple Inc. (NSDQ:AAPL) in the first quarter which were valued at $1.07 billion at that time. The company took a lot of criticism for loading up on a tech giant, adding to concerns that Berkshire Hathaway might be losing its appeal. But Apple could prove to be a promising pick as soon as this month.

Warren Buffett and his long-time lieutenant Charlie Munger have often talked about their reluctance to put their money in fast-growing technology companies like Apple. Historically, IBM (NYSE:IBM) has been the only technology stock in Berkshire Hathaway’s portfolio. In fact, according to Berkshire Hathaway’s latest filing, the Big Blue is its fourth largest holding, representing a little less than 10% of the Omaha, Nebraska-based company’s portfolio.

However, it is worth remembering that Warren Buffett himself did not actually purchase Apple. In fact, Buffett has confirmed that the investment was made by one of his stock-pickers, which implies that it was either Todd Combs or Ted Weschler, two of Warren Buffett’s most trusted protégés, who made the decision to load up on Apple stock.  Despite the criticism, I believe it’s a clever move which shows that Warren Buffett’s lieutenants are willing to bet on Apple’s future without putting a large chunk of Berkshire Hathaway’s money in the tech giant. Although an investment of a billion dollars seems like significant, it is actually a very small part of Berkshire Hathaway, making less than 1% of the conglomerate’s $129 billion portfolio.

Has Berkshire Nabbed Apple Inc. Stock At A Great Price?

Berkshire Hathaway has purchased Apple stock at a time when it is under some serious pressure, thanks to the poor performance of phones released last year, slowdown in the global smartphones market and weakness in China. In its most recent quarterly results, Apple’s sales dropped for the first time in the last 13 years by 12.8%, and the company projected a 13% to 17% drop for the current quarter. Some fear that Apple, following the extraordinary success of iPhones, has nothing new to offer and has essentially run out of ideas. Some analysts, such as KGI Securities’ Ming-Chi Kuo, believe that the company will continue to struggle with shrinking sales in the near future, despite the anticipated release of iPhone 7 later this year. Not surprisingly, Apple stock has under-performed in 2016. So far this year, the company’s shares have dropped almost 7% which compares against the 1.3% decline in the Nasdaq and 3.1% gain in the S&P-500.

The pessimism, however, gave Berkshire Hathaway an opportunity to nab Apple at a great price. Remember, Apple is still one of the most profitable companies and has been successful in generating extraordinary returns for shareholders.

According to data from Thomson Reuters, on an average, Apple has generated a strong net profit margin of 23.2% over the last five years – that’s three times as much as the industry’s average of 7.49%. In the same period, it reported an average return on invested capital of 34.4% - that’s the ninth highest number amongst S&P-1500 technology companies. Yet at $97.95 a piece, Apple stock is priced just 11.8-times this fiscal year’s consensus earnings estimates, as per latest data from FactSet. This makes Apple one of the cheapest of the ten most profitable S&P-1500 technology companies – which include Accenture (NYSE:ACN), Gartner (NYSE:IT) and Manhattan Associates (NSDQ:MANH) – whose shares are trading at more than 20-times this year’s earnings estimates.

Looking Ahead To WWDC 2016

Finally, and most importantly, Apple is due to host the 27th version of its Worldwide Developer Conference (WWDC) from June-13.  At WWDC, the California–based company usually gives new software updates for its iPhone, iPad, Apple Watch, Apple TV and Mac. But this time, it could use the event as an opportunity to showcase the next leg of its major growth drivers. For instance, the company is expected to unveil the third major version of Apple Watch’s operating system, the watch OS 3.0. But a real surprise would be if Apple reveals a new version of the watch itself or announces a launch date.

In addition to this, Apple could also announce a major revamp of its music streaming service, Apple Music, by upgrading Beats 1 radio, improving the user interface and enhancing the download and streaming services. The overhaul will likely be accompanied by a huge marketing campaign designed to lure additional paid subscribers. This could give the company an opportunity to expand its 13 million subscriber base and compete more effectively with its bigger rival Spotify. This could give a boost to Apple Music revenues and offset the negative impact related to stagnant iTunes sales.

Similarly, Apple could also launch a new version of Apple TV. But here, a real surprise would be if Apple gives a time-frame around the highly anticipated streaming service. Rumors have been rampant for years that the tech giant has been developing a product that would directly compete with Netflix and Amazon Prime Video. There have been reports that Apple has shown interest in buying Time Warner Inc. (NYSE:TWX), one of the world’s largest entertainment content companies and the owner of Warner Brothers studios, HBO and other media assets. The company is also reportedly discussing with other media companies about cost of their video content. At this stage, it seems that it is too early for Apple to launch a streaming service, but it can still showcase its future plans or provide a launch date for an original program. The company has been reportedly working with Dr. Dre, the co-founder of Beats Music, on developing a dark drama series called Vital Signs.


Berkshire Hathaway’s investment in Apple could turn out to be a clever move. The company bought $1 billion of Apple stock at a great price since Apple was already under pressure due to its poor performance over the last few quarters and concerns regarding future growth. But Apple could give a glimpse of its major growth projects in the upcoming WWDC. This could ease investor’s concerns regarding the tech giant’s future, which will have a positive impact on Apple stock.

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