After decades of cautious suspicion towards technology-related stocks (with the notable exception of IBM), Warren Buffett has crossed the Rubicon and is now an Apple shareholder. The news clearly took the financial community by surprise: Apple’s stock jumped by 2% in pre-market trading after the announcement (indicated by a green arrow in the chart below) and is now up 4% compared with last week.
Not only does the move surprise given Mr. Buffett’s historical ‘tech-adverse’ inclination but this move also contradicts a statement he made no earlier than 4 years ago, saying that he would “not be able to value [Apple’s] stocks“. Last but not least, Berkshire is investing at a time when another famous investor, Carl Icahn, has taken the opposite direction by offloading his $4bn stake last month.
Why has Warren turned round? We cannot accuse Berkshire of trying to benefit from the recent air pocket Apple went through which we discussed on this blog three weeks ago, since the stake was built throughout the first quarter. Nor can we assume that Mr. Buffett will be able to impose his views on Apple’s management: his stake is important in nominal terms ($1bn), but only represents 0.2% of the total shareholder structure.
In my view, the reason lies in another factor we have underlined. According to our EV/EBITDA benchmarks (reproduced below) the market is primarily viewing Apple as a hardware company at present, which is understandable given the share of revenues generated by devices such as the iPhone and, to a lesser extent, the iPad and the iPod.
And yet, Apple is trying hard to get out of the generally slow-growing, low-margin hardware trap where it can be considered as an alien – but for how long? – by investing part of its massive war chest into promising ventures, both internally – iTunes and, more recently, iCloud – and externally – the $1bn stake taken in Chinese ride-hailing app Didi Chuxing is the most significant to date.
If Apple manages to grow the seeds it has been planting over the last few years and to convince Wall Street that it has now become a credible player in the ‘virtual’ space alongside other tech behemoths such as Google, Amazon or Microsoft, it will be able to command a higher valuation multiple which will ultimately lift its stock price. And the ‘Oracle of Omaha’ will have won his bet (once more).