Apple remains Buffett’s biggest public stock holding, but his thesis about its moat faces questions

Berkshire
Hathaway‘s
Warren
Buffett
was
still
using
a
flip
phone

as
late
as
2020,
four
years
after
his
investment
behemoth
started
amassing
a
huge
stake
in
the
company
that
makes
iPhones.

“I
don’t
understand
the
phone
at
all,
but
I
do
understand
consumer
behavior,”
Buffett
said
last
year
at
Berkshire’s
annual
shareholder
meeting
in
Omaha,
Nebraska.

He’s
emerged
in
recent
years
as
one
of


Apple’s
top
evangelists.

At
the
end
of
2023,
Berkshire
owned
about
6%
of
Apple,
a
stake
worth
$174
billion
at
the
time,
or
about
40%
of
the
conglomerate’s
total
value.
That’s
about
four
times
bigger
than
Berkshire’s
second-biggest
public
stock
holding,


Bank
of
America,
and
makes
the
company
the
No.
2
Apple
shareholder,
behind
only
Vanguard.

As
Berkshire
investors
and
fanboys
of
the
93-year-old
Buffett
flood
Omaha
this
weekend
for
the
2024
annual
meeting,
Apple
is
likely
to
be
a
hot
topic
of
discussion.
The
tech
giant
on
Thursday

reported
a
10%
year-over-year
decline
in
iPhone
sales,
leading
to
a
4%
drop
in
total
revenue.
But
the
stock
had
its

best
day
since
late
2022
on
Friday
due
largely
to
a
$110
billion
stock
buyback
plan
and

increased
margins
that
result
from
a
growing
services
business.

The
bet
on
Apple
and
CEO

Tim
Cook
has
paid
off
handsomely
for
Buffett,
who
said
in
2022
that
the
cost
of
Berkshire’s
Apple
stake
was

only
$31
billion.
His
firm
is
up
almost
620%
on
its
investment
since
the
start
of
2016.

Despite
being
a
self-described
Luddite,
Buffett
has
long
had
a
coherent
non-techie
thesis
for
loving
Apple.
He’s
seen
how
devoted
Apple
users
are
to
their
devices,
and
has
viewed
the
iPhone
as
an
extraordinary
product
that
could
keep
its
customers
spending
inside
the
Apple
ecosystem.
He
calls
it
a
moat,
one
of
his
favorite
words
for
describing
his
preferred
businesses.

“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,”
Buffett

said
at
last
year’s
meeting. “And
if
they
had
to
give
up
their
second
car
or
give
up
their
iPhone,
they’d
give
up
their
second
car!”

Data
is
in
his
favor.
According
to
a
study
from
Consumer
Intelligence
Research
Partners,
Apple
benefits
from
94%
customer
loyalty,
meaning
that
nine
out
of
10
current
U.S.
iPhone
owners
choose
another
iPhone
when
buying
a
new
device.

Buffett
also
has
hailed
Apple’s
ability
to
return
billions
of
dollars
to
shareholders
annually
through
share
buybacks
and
dividends,
a
capital
allocation
strategy
for
which
the
billionaire
investor
may
have
himself
to
thank.
When
the
Apple
CEO
was
asked
in
a

2016
interview
with
The
Washington
Post
who
he
turns
to
for
advice
at
pivotal
moments,
Cook
offered
up
a
story
about
his
relationship
with
Buffett.

“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?”
Cook
said. “So
I
called
up Warren
Buffett.
I
thought
he’s
the
natural
person.”

Apple
has
shown
its
appreciation
for
the
Oracle
of
Omaha
in
other
ways.

In
2019,
the
company
published
an
original
iPhone
game
called “Warren
Buffett’s
Paper
Wizard”
in
which
a
paperboy
bikes
from
Omaha
to
Apple’s
hometown
of
Cupertino,
California.

But
with
Apple’s
business
having
declined
in
size
in
five
of
the
past
six
quarters
and
with
the
company
expecting
just
low
single-digit
growth
in
the
current
quarter,
Buffett
may
face
questions
this
weekend
at
the
shareholder
meeting
about
whether
he
still
sees
the
same
power
in
the
moat,
particularly
with
regulatory
pressures
building
around
tech’s
mega-cap
companies.

Buffett
trimmed
his
stake
in
Apple

late
last
year,
though
only
by
about
1%.
Even
after
Friday’s
rally,
the
stock
is
down
3.8%
in
2024,
while
the
S&P
500
is
up
7.5%.

Berkshire’s
initial
foray
into
Apple
in
2016
was
not
Buffett’s
idea.
Rather,
the
investment
was
led
by
Ted
Weschler,
one
of
his
top
deputies,
and
was
seen
as
a
passing
of
the
torch
to
the
next
generation
of
Berkshire
investment
managers.

But
the
following
year,
Berkshire
started
purchasing
even
more
Apple
shares,
and
Buffett
began
talking
it
up.
He
said
he
liked
the
stock
and
the
company’s “sticky”
product,
although
he
didn’t
use
it.

In
2018,
he
said
Apple
users
are “very,
very,
very
locked
in,
at
least
psychologically
and
mentally”
to
the
product
and
the
ecosystem.

“Apple
has
an
extraordinary
consumer
franchise,”
he
said.

At

last
year’s
annual
meeting,
when
asked
how
Berkshire
can
defend
having
Apple
make
up
so
much
of
its
public
portfolio,
Buffett
said, “It
just
happens
to
be
a
better
business
than
any
we
own.”
He
also
hailed
Cook,
calling
him
one
of
the “best
managers
in
the
world.”

A
number
Apple
likes
to
use
to
tout
the
health
of
its
business,
despite
the
declining
revenue,
is “2.2
billion.”
That’s
how
many
devices
the
company
says
are
currently
in
use
and
points
to
the
massive
customer
base
available
as
Apple
rolls
out
new
subscription
services.

“Once
customers
get
into
the
ecosystem,
they
don’t
leave.
So
it’s
not
a
speculative
tech
play,”
said
Dan
Eye,
chief
investment
officer
at
Fort
Pitt
Capital
Group,
which
owns
Apple
shares. “It’s
kind
of
more
like
an
annuity
and
I
think
that’s
what
Warren
Buffett
really
sees
as
well.”

In
addition
to
the
drop
in
revenue,
Apple
faces
new
challenges
from
regulations
and
weak
overseas
markets,
as
well
as
from


Microsoft
and


Google’s
advancements
in
artificial
intelligence.
For
regulators,
the
concern
surrounds
the
very

moat
that
Buffett
finds
so
attractive,
and
whether
it
gives
the
company
monopolistic
control
in
the
smartphone
market.

The
U.S.
government
in
March

alleged
that
Apple
designs
its
business
to
keep
customers
locked
in.
The
Department
of
Justice’s
lawsuit
claimed
that
products
like
Apple
Card,
the
Apple
Arcade
game
subscription,
iMessage
and
Apple
Watch
work
best
or
only
with
an
iPhone,
creating
illegal
barriers
to
competition
and
making
it
harder
for
consumers
to
switch
when
it’s
time
for
an
upgrade.

However,
the
litigation
is
expected
to
take
years,
pushing
any
potential
penalties
to
Apple
and
its
products
well
into
the
future.
In
the
meantime,
there’s
no
sign
that
the
iPhone
is
becoming
less
important
as
new
devices
like
virtual
reality
goggles
have
found
only
niche
audiences,
while
consumer
AI
products
have
failed
to
take
off.

Buffett
hasn’t
voiced
his
view
publicly
on
Apple’s
regulatory
hurdles,
and
this
will
be
the
first
opportunity
for
investors
to
ask
him
about
the
issue
since
the
DOJ’s
lawsuit.
But
Buffett
knows
a
little
something
about
regulation
—
two
markets
where
he’s
most
active
are
railroads
and
insurance.

In
a
note
to
clients
earlier
this
month,
Bernstein
analyst
Toni
Sacconaghi
didn’t
go
deep
on
regulatory
concerns,
but
mentioned
that
he
doesn’t
believe
the
DOJ
suit
will “seriously
threaten”
the
strength
of
Apple’s
ecosystem.
He
also
said
that
following
Buffett’s
lead
on
getting
in
and
out
of
Apple
is
a
solid
strategy
for
making
money.

“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,”
Sacconaghi
wrote.
He
encouraged
investors
to “be
like
Buffett.”

Odds
are
that
Buffett
was
thrilled
with
Apple’s
announcement
this
week
regarding
its
expanded
repurchase
program.
It’s
a
practice
he’s
long
adored.

“When
I
buy
Apple,
I
know
that
Apple
is
going
to
repurchase
a
lot
of
shares,”
he
said
in
2018. 

And
he
likes
to
note
how
buybacks
result
in
getting
a
bigger
stake
in
the
company
without
buying
more
shares.

“The
math
of
repurchases
grinds
away
slowly,
but
can
be
powerful
over
time,”
Buffett

said
in
2021.

Apple
also
increased
its
dividend
by
4%,
and
signaled
that
it
would
continue
to
lift
it
annually.

Buffett
was
effusive
about
the
tech
giant’s
capital-return
strategy
at
the
conglomerate’s
annual
meeting
last
year,
pointing
out
that
it
helped
Berkshire
own
a
bigger
piece
of
the
pie.
Unlike
insurance
company
Geico
and
homebuilder
Clayton
Homes,
which
his
firm
owns
in
their
entirety,
Berkshire
can
continue
to
increase
its
stake
in
Apple,
a
fact
he
reminded
investors
of
at
the
meeting.

“The
good
thing
about
Apple
is
that
we
can
go
up,”
Buffett
said.