Warren Buffett's Berkshire Hathaway has rapidly grown its Apple investment. So what draws the Oracle of Omaha to this tech giant, a sector he has avoided for so many years?
Warren Buffett, the sage of Omaha, as he is lovingly called, had for long chosen to stay out of the world of multi-bagger tech stocks. However, the recent entry into Apple (NASDAQ:AAPL) has surprised many. Why? Well, because Apple and technology come across as synonyms for a lot of people. And rightly so! The Cupertino, California-based tech behemoth has disrupted multiple technology markets in the last few decades. Apple has a history of disruptive products right from the Mac, iPod, iPhone and the iPad, as each of these products jolted their respective broader markets into action. However, Warren Buffett's investment in Apple has less to with Apple as a technology giant, as he still claims he doesn't understand tech. So Why is he buying Apple shares at a rapid pace?
Warren Buffett views Apple as a consumer company.
Yes, Warren Buffett has been buying shares of Apple rapidly. In fact, the Buffett-led Berkshire Hathaway (NYSE:BRK.A) has lapped up over 70M Apple shares between December 31, and Apple's latest earnings report at the end of January. That's more than twice the number of shares the company reported in its 13F filing for the period ending December 31. By Warren Buffett's own admission on CNBC's 'Squawk Box' Berkshire Hathaway now has 133M shares of Apple Inc., which equates to $18.5B worth of Apple stock at the last closing price. In other words, Berkshire Hathaway now holds nearly 2.5% of Apple's total market cap. And well, Warren Buffett has himself bought 123M of those shares. Quoting the Oracle from the 'Ask Warren' show, "One of them had had 10 million shares, and then I bought another 123 million shares, or something like that." The 'One of them' here refers to one of Warren's deputies, Ted Weschler or Todd Combs. When asked why is he buying Apple shares? The Oracle of Omaha remarked: 'Cause I Liked It.' Coming to the big question of 'Why does Warren Buffett now like Apple, the tech giant, after having avoided technology companies for so many years?'
Well, the answer is Warren is not even looking at Apple, the tech giant. He still maintains and says that he is not a technology investor. When asked to explain the rationale of investing in Apple, this is what Buffett had to say, "Well, I would say Apple's — I mean, obviously it's very, very, very tech-involved, but it's a consumer product to a great extent too. And I mean, it has consumer aspects to it......Apple strikes me as having quite a sticky product and enormously useful product that people would use, and not that I do.....And I don't know what goes on inside their research labs or anything of the sort. I do know what goes on in their customers' minds because I spend a lot of time talking to 'em." The Oracle of Omaha believes that the Cupertino-based tech giant has a very sticky product which gives the company a huge earning power. Well, it isn't surprising that Apple is able to move millions and millions of products and prices which aren't anywhere close to 'pocket-friendly.'
Apple's huge cash pile is a margin of safety
The legendary value investor didn't really spend much time on the margin of safety. But when you come to think of it, Apple does have a huge margin of safety. With $246B in cash and cash equivalents or something to the tune of $220B (after a 10% repatriation rate), AAPL stock is selling at an ex-cash PE ratio of less than 12. A business generating nearly $52.5B in annual free cash flows at an (ex-cash) valuation of $523B, or a P/CF ratio of under 10. And, well, Apple is also a shareholder friendly company, which means a decent dividend to go along with the investment. The current annualized dividend of $2.28 could earn Berkshire annual dividend payments of a cool $300M in annual dividends.
Apple Is A Cash Generating Machine
Apple has steadily increased its capital returns program over the last few years, paying increasing dividends while also increasing its spend on share repurchases. But, does that, in any way, dampen the company's future? Well, if you look at the company's capital returns program over the last twelve months, it has spent a total of $48B on its capital returns program, compared to its LTM free cash flow of $52.5B. And well, that's after an R&D (Research&Development) spend which has increased by an average of nearly 31% YoY over the last 3 years, hitting $10.05B in FY 2016. And, that's one of the biggest R&D budgets out there.
With a background on the the amount of R&D and capex expenditures Apple is undertaking, its safe to assume the company is doing everything it can to remain a disruptive force in the world of tech. However, that's not really the point here. The point to note is that in spite of these massive expenses, the company keeps adding to its cash pile with each passing year. And, its this ability to spit out these huge amounts of cash that puts Apple in a league of its own. The company is generating a far greater amount of cash than it can currently spend, and that's a wonderful business to be a part of. The fact that the management has been actively increasing spends on Capital returns without compromising on their future is laudable. If you ain't able to find enough use cases for the cash you generate, you ought to return it to the rightful owners. And, Apple is doing just that.
Warren Buffett-led Berkshire Hathaway has scaled its position in Apple stock, nearly doubling the number of shares from the last reporting period. Apple could, in fact, be the third largest holding in the portfolio, based on the legendary investor's latest comments. While it could be baffling to understand what draws the Oracle of Omaha to a tech giant, investors need to look at Apple from a slightly perspective. Apple has a really sticky product (think products which can be around for a long long time), is a cash generating machine and comes with a significant margin of safety. And suddenly, Apple doesn't seem like a un-Warren Buffett like investment now.
Looking for great tech stocks? Check out our top stock picks, which have beaten the NASDAQ by over 125%.