In May 2016, after nearly a lifelong aversion to technology stocks, Warren Buffett invested $1 billion in Apple Inc. (NASDAQ:AAPL). It was his very first investment in technology space. The development attracted the eyeballs of many as the Oracle of Omaha is being followed by almost every firm and individual interested in finance management or financial investment. It was not immediately clear why Warren was so keen to cook an Apple Buffett then, after almost eight months his another major move has probably answered what is Warren up to eventually.
Warren Buffett is buying Apple
Yes, and we mean it. Recently Warren’s Berkshire Hathway has made a humongous investment in Apple to become the fifth largest investor in the company. The latest move by Warre Buffett must be applauded as the man in his 80’s is wanting to be re-tested for his skills at the time when the dynamics of business are going through a major transformation worldwide.
So, what is Warren Buffett is up to?
If you are the one who follows Buffett’s investments closely, you may agree to the fact that Buffett doesn’t excite about the low-hanging fruits. He always loves to pay a fair price for a business that has a great challenge to replicate. Buffett’s investment strategy has been very clean and clear; get hold of a business that offers a profit margin with a defensible business model. And, Apple offers both of these!
In mobile device business – both smartphone and tablet – Apple is the only company that acquires a customer in a true sense. When a person buys an iPhone, he gets locked into the Apple ecosystem, because of the very nature of business. Almost every service, be it App Store, iCloud, iMail, Safari or anything else, Apple has got offerings in every section a mobile user want to explore.
No wonder iPhone garnered 92% of the smartphone industry profit, in terms of hardware, in Q4 2016. Despite the fact that many copy-cats tried to leverage on Apple’s product designs, Apple’s revenue and profit from selling devices have been increasing with each passing year. It’s clearly evident that Apple is ruling the mobile hardware business with almost no competition.
Now, combine Apple’s success story of hardware business with Services. Apple’s services business is growing with nearly 21% year over year growth, to $24 billion in 2016. To put things in perspective, McDonald clocked whole year revenue was $24.6 billion in 2016; it means Apple’s one of the revenue arm is as big as world’s largest fast food chain on earth.
Interestingly, Apple’s stocks seem more promising than McDonald’s, considering the fact that later one face immense competition from the likes of TacoBell and KFC, every year. Once in it, most of the Apple users prefer to stick with the ecosystem and contribute to the company’s growing revenue. On the other hand, even the loyal customers of McDonald keep jumping off the shift in the wake of discounts, services and change of taste buds offered by competitors.
It’s clearly evident that Apple’s status in the stock market is like a magnet, something that Microsoft had in 90’s and Google and Facebook are enjoying today. The growth and poll position of Apple in the market is quite rare, something that Warren Buffett is wary of. No wonder, Apple may be the first tech company to touch a valuation of $1 trillion – much before Facebook or Google achieve the same milestone.
Warren Buffett’s move to join the tech industry is an amazing development and unfold many more interesting developments in the near future. Buffett, along with his advisor for a decade, Charlie Munger, may end up rewriting the investment rules, after the decades of shying away from technology stocks.
We would love you with a thought of Buffett, which may help you read the mind of Oracle of Omaha.
I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
