Why Does Warren Buffett Like Apple?

Why Does Warren Buffett Like Apple?  Some people were surprised when Berkshire Hathaway—Buffett’s company—purchased 10 million shares of Apple stock in 2016.

Buffett rarely takes big risks on tech companies. Despite his former hesitancy to invest in tech stocks, Berkshire Hathway reportedly owns 5% of Apple. In fact, Apple now stands out as Berkshire Hathaway’s largest investment. The company owns about $120.4 billion of Apple stock, according to its 2021 first-quarter report.

Other sizable companies in the portfolio include Bank of America Corporation ($31.3 billion), The Coca-Cola Company ($21.9 billion), and America Express Company ($18.3 billion).

The amount of money that Buffett has spent on the stock raises a critical question: Why does Warren Buffett like Apple? 

What Does Warren Buffett Invest In?

Warren Buffett doesn’t necessarily invest in specific segments of the economy, although he does tend to avoid some.

He seems more focused on putting his money into companies that can support themselves. At 90 years old, Buffett has watched the economy shrink and surge several times. He knows that the economy will eventually struggle through a difficult period, so he prefers companies that can survive dry spells. That usually means betting on corporations that borrow as little money as possible and stand out as industry leaders.

In recent years, Warren Buffett and Berkshire Hathaway have shown significant interest in:

• General Motors (GM)—he first bought the stock in 2012 and purchased even more in 2020.
• Kroger (KR)—he bought stocks in the retail giant near the end of 2019, showing that he believes it can compete with conglomerates like Walmart and Amazon, which owns Whole Foods.
• Amazon (AMZN)—Berkshire Hathaway purchased Amazon shares in 2019 but hasn’t increased its holdings since.

It’s also worth noting what companies Warren Buffett sold in 2020. Berkshire Hathaway sold all of its shares in:

• Pfizer (PFE)—Buffett bought the stocks earlier in the year, likely banking on profits from a coronavirus vaccine, but sold all of them by the end of 2020.
• JPMorgan Chase (JPM)—he has been selling JPMorgan Chase shares slowly and decided to dump them all in 2020.
• Barrick Gold (GOLD)—Berkshire Hathaway reduced its stake in Q3 2020 and sold the rest in Q4.

It’s interesting to see such high turnover since Buffett usually takes a firm buy-and-hold approach to investing.

Why Did Warren Buffett Buy Apple?

During an uncertain year when the stock market took several ups and downs, why did Warren Buffett decide to buy more Apple shares?

He has stated before that he likes Apple because the company has a strong ecosystem and brand. That’s true.

Apple has created an exclusive ecosystem much more successfully than most tech companies. While other tech companies look for ways to integrate their products, Apple has stuck to its commitment to building uncompromising products and services. Making it easier for other companies to integrate with those products and services only opens the door to a diminished experience for customers.

Apple has a long-term strategy to attract brand loyalists willing to pay for quality. Buffett also understands that Apple customers are willing to pay a fortune for their devices. He has stated that they are likely more willing to give up their cars than their phones. In short, the pricing power Apple possesses is enormous, and ultimately that allows the company to charge for $1,000+ phones and potentially in the future much more expensive phones.

Buffett also sees Apple as an essential business for consumers and businesses around the world. Apple beat other companies to the market with portable devices that could play digital music with a simple user experience. Then, it brought smartphone technology to the world while many of its competitors were struggling to connect their devices to the internet at all.

Apple has a vision, and it pursues that vision in a strategic manner that involves taking calculated risks on how consumers will respond to new concepts. So far, most of Apple’s products have succeeded. Those that fail get forgotten rather quickly.

Warren Buffett Apple Price Target

Berkshire Hathaway (BRK.B) sold some of its Apple shares during Q1 2021 at $145.50. Since the investment company kept a substantial number of shares, though, it’s difficult to say that it sold some of Apple because the stock reaches Warren Buffett’s price target. More likely, Apple share price moved too far too fast and Buffett wanted to lock in gains.

The consensus among most traders is that Apple’s price target is approximately $160. It’s feasible to assume that Buffett has a similar view.

Is Warren Buffett Selling Apple?

It may sound surprising at first, but Warren Buffett is selling some of his Apple shares. The word “some” plays an essential role in that statement considering that Apple remains Berkshire Hathaway’s biggest investment.

So, why would Warren Buffett sell shares in a stock that holds so much promise? Berkshire Hathaway made about $1 billion from the sale. Around the same time, it picked up shares in Chevron, Verizon, and Marsh & McLennan. Selling the Apple shares likely helped to finance the purchase of the investments in these companies.

How High Could Apple Go?

How high its share values can go depends on how consumers respond to its upcoming products. But a discounted cash flow analysis forecasts a share price of $157 per share.

Keep in mind that Apple has enormous optionality based on its cash pile. For example, when it decided to attack the market owned by Netflix it was able to offer a similar service for free for a year. Equally Apple has a stealth division that is constantly researching what the next big markets that can move the needle on its top line sales are.

Why Does Warren Buffett Like Apple: Conclusion

Warren Buffett seems to like Apple because it has a strong brand and exclusive ecosystem that encourages consumers to buy more products from its line. More importantly, Apple has pricing power because consumers are so loyal to its products that they would pay a real premium before giving them up.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.