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Warren Buffett saw Apple’s potential early on.
Drew Angerer/Getty Images
Apple
is Warren Buffett’s biggest investment coup during his 58 years of leading
Berkshire Hathaway
.
With Apple’s market value hitting $3 trillion Friday, Berkshire Hathaway’s stake in the iPhone maker (some 915 million shares) is worth $176 billion, more than five times its cost of $31 billion.
Apple (ticker: AAPL) stock rose 1.5% to $192.46 in early trading Friday, a record level, while Class A shares of Berkshire Hathaway (BRK/A) are 0.8% higher to $516,500. The Berkshire B shares (BRK/B) are up 0.8% at $339.70 and are within about 5% of their record high hit in March 2022.
How did Buffett do it? He recognized Apple’s strengths and bought the shares inexpensively.
Investor Seth Klarman, the head of Baupost Group, touched on this in a CNBC interview this week: “Buffett thinks hard about the highest-quality businesses but only buys them at attractive prices.”
That’s an underappreciated aspect of Buffett’s approach. While he is known for moving away from a deep-value investment approach—favored by his mentor Benjamin Graham—to growth stocks, he is disciplined in what he pays.
When Buffett was accumulating what has become a nearly 6% stake in Apple from 2016 to 2018, he was paying about 15 times earnings when the stock traded at a split-adjusted price in the low $30 area.
Buffett generally doesn’t like to pay more than 15 times earnings. Such was the case when he started accumulating
Coca-Cola
(KO) in the late 1980s—another big score with Berkshire’s Coke stake now valued at $24 billion, about 18 times its cost.
With Apple, Berkshire has benefited from earnings growth: The iPhone maker’s profits are expected to triple to about $6.75 a share in the coming fiscal year ending in September 2024 relative to fiscal 2017. The other boost to Apple has come from a doubling in its price-to-earnings ratio.
Buffett, 92, recognized seven years ago that Apple wasn’t just a technology hardware company deserving a low price-to-earnings multiple, but a consumer and services company with a sticky customer base and phenomenal brand.
Buffett remarked at the time that one reason he bought the stock was that when he would take his grandchildren to an Omaha Dairy Queen (owned by Berkshire), they would be glued to their iPhones.
He said on CNBC earlier this year that it would take a lot to pry Apple phones away from users: “If you’re an Apple user and somebody offers you $10,000 but the only proviso is that they’ll take away your iPhone and you’ll never be able to buy another, you’re not gonna take it.”
Buffett also likes the Apple boss: “Tim Cook is the one of the classiest CEOs in that he understands the business and he has a product which Steve Jobs basically invented, but Tim Cook has managed that company in an extraordinary way,” Buffett told CNBC.
At Berkshire’s annual meeting in May, Buffett said Apple is better than any of Berkshire’s wholly owned subsidiaries. He added that while he doesn’t “understand the phone at all, but I do understand consumer behavior.”
“Apple has a position with consumers where they’re paying—maybe they pay $1,500, or whatever it may be, for a phone,” he said at the annual meeting. “And these same people pay $35,000 for having a second car. And if they had to give up a second car or give up their iPhone, they give up their second car. I mean, it’s extraordinary.”
That makes it unlikely that Buffett will pare the Apple holding—plus his aversion to paying capital-gains taxes. Buffett also doesn’t mind having concentrated investments.
Apple now represents nearly half of Berkshire’s $370 billion equity portfolio and almost a quarter of Berkshire’s market value of almost $750 billion. Coke,
American Express
(AXP),
Chevron
(CVX), and
Bank of America
(BAC)—the next largest Berkshire equity holdings—each represent 6% to 8% of the portfolio.
In just one example of Buffett’s extraordinary recall of financial information, Buffett correctly mentioned at the May meeting that Apple had 15.7 billion shares outstanding.
Buffett loves that Apple keeps repurchasing stock and increasing Berkshire’s percentage ownership without doing anything. All this suggests Apple could be an investment with Buffett’s favorite holding period: forever.
Write to Andrew Bary at andrew.bary@barrons.com
