Buffett's Apple Stake at $174B Amid iPhone Sales Dip

Key Takeaway

• Berkshire Hathaway owns 6% of Apple, worth $174 billion, making it Buffett's largest public stock holding despite a 10% drop in iPhone sales.
• Apple's $110 billion stock buyback plan and services business growth demonstrate its resilience and commitment to shareholder value.
• Regulatory scrutiny and competition in China pose challenges, but Apple's strong ecosystem likely shields it from immediate threats.

Berkshire's Apple Bet

Warren Buffett, the CEO of Berkshire Hathaway, has long been known for his traditional investment strategies and personal preference for simplicity, famously using a flip phone well into the era of smartphones. Despite this, Berkshire Hathaway has made a significant investment in Apple, a company at the forefront of technology and innovation. By the end of 2023, Berkshire owned approximately 6% of Apple, translating to a stake worth $174 billion, making it the conglomerate's largest public stock holding and marking Berkshire as the second-largest Apple shareholder after Vanguard. This investment reflects Buffett's confidence in Apple's consumer appeal and its ability to generate shareholder value through its products and services.

Buffett's investment strategy for Apple is rooted in his understanding of consumer behavior and the company's strong customer loyalty, with a 94% loyalty rate among U.S. iPhone owners. He appreciates Apple's "moat" — a term he uses to describe a company's competitive advantage — highlighting the iPhone's integral role in consumers' lives and Apple's ecosystem that encourages continued spending. Buffett's admiration for Apple's capital return strategy, including share buybacks and dividends, further solidifies his belief in the company's value to shareholders.

Apple's Financial Performance

Apple's recent financial performance has shown some challenges, with a 10% year-over-year decline in iPhone sales and a 4% drop in total revenue. However, the company's stock experienced a significant rally following the announcement of a $110 billion stock buyback plan and an increase in margins due to a growing services business. These moves demonstrate Apple's ongoing commitment to returning value to shareholders and its ability to adapt its business model to maintain profitability.

Despite the decline in hardware sales, Apple's expansive ecosystem, which includes 2.2 billion active devices, offers a robust platform for growth through new subscription services. This ecosystem strategy aligns with Buffett's view of Apple as more than just a tech company, but as a provider of valuable, annuity-like services to its loyal customer base.

Regulatory and Market Challenges

Apple faces several external challenges, including regulatory scrutiny over its business practices and competition in key markets like China. The U.S. Justice Department has raised concerns about Apple's ecosystem potentially creating illegal barriers to competition. Additionally, Apple's performance in China, a crucial market for the company, has seen volatility amid increased competition and geopolitical tensions.

Despite these challenges, analysts like Toni Sacconaghi of Bernstein believe that Apple's ecosystem strength is unlikely to be seriously threatened by regulatory issues in the near term. Moreover, the company's strategic moves, such as its record stock buyback announcement and dividend increase, signal confidence in its financial health and future growth prospects.

Street Views

• Toni Sacconaghi, Bernstein (Neutral on Apple):

  "Despite his reputation as a long term buy and hold investor, Warren Buffett has been remarkably disciplined at adding to his Apple position when it is relatively cheap and trimming when it is relatively expensive."

Management Quotes

• Warren Buffett, CEO of Berkshire Hathaway:

  "I don’t understand the phone at all, but I do understand consumer behavior." "Apple has a position with consumers that they’re paying $1,500 or whatever it may be for a phone, and these same people pay $35,000 for a second car. And if they had to give up their second car or give up their iPhone, they’d give up their second car!"

• Tim Cook, CEO of Apple:

  "When I was going through [the question of] what should we do on returning cash to shareholders, I thought who could really give us great advice here? Who wouldn’t have a bias? So I called up Warren Buffett. I thought he’s the natural person."