Eric Francis
It’s no secret that in the past, Warren Buffett and Berkshire Hathaway (BRK.A) (New York Stock Exchange: BRK.B) Avoid investing in technology stocks.
But in recent history, this slogan has changed, as the group has made significant investments in companies such as IBM (New York Stock Exchange: IBM), HP (New York Stock Exchange: HPQ), Taiwan Semiconductor (TSM) and perhaps most notably Apple (Nasdaq: AAPL).
While some positions have worked well for Buffett and Berkshire — namely Apple (AAPL) — others, such as IBM (IBM), have not. And with the jury still out on HP (HPQ), Bernstein analyst Tony Sacconaghi wondered why, after so many years, Buffett decided to move into technology.
The likely answer is that all three companies “fit well” with several of Buffett’s key investing narratives: the group has leading equity and equity positions, well-known brands, strong capital-return programs, and “reasonable” valuations.
While all of that can be seen in both foresight and hindsight, it’s fair to wonder why Berkshire Hathaway’s (BRK.A) (BRK.B) largest center Apple (AAPL) to date has worked so well for Buffett, while The others did not.
Sacconaghi believes it comes down to the fact that Apple (AAPL) is “a consumer brand that can be leveraged.” The Tim Cook-led company has moved outside its core hardware products into other markets such as streaming music and movies, financial services and cloud storage, and has built a “high-margin” services business.
Some analysts believe that more than half of Apple’s (AAPL) $2.5 trillion market cap can be tied to its venerable services business, which includes the App Store, Apple Music, Apple TV+, Apple Pay, iCloud, and more. As of the end of fiscal year 2022, Apple (AAPL) had more than 900 million subscriptions to its various service offerings.
On the contrary, IBM (IBM) did not have anything similar, and ended up lagging behind in the seismic shift in the technology industry, and the push towards cloud computing, Sakunagi explained. IBM has made penetration into the massive market, but is still far behind Amazon Web Services (AMZN), Microsoft (MSFT) Azure, and Google (GOOG) Cloud Platform.
Regarding HP (HPQ), Sacconaghi said it’s possible Buffett thinks the company is more like Apple (AAPL) than IBM (IBM). It’s also possible, Sacconaghi added, that a shift in technology, including a move away from printed pages, “threatens to undermine HP’s earnings strength, similar to what happened with IBM,” noting that switching barriers in HP’s core business is not like switching from iOS.
For now, Sacconaghi said, Buffett is unlikely to add “material” to his position at Apple (AAPL) at its current levels. Apple (AAPL) currently accounts for nearly 40% of Berkshire (BRK.A) (BRK.B) stock portfolio, and the legendary 92-year-old Buffett was a “very disciplined” buyer of the stock, buying stocks when they were trading for less than 20%. Double their profits and sell them for more than 25 times more profits.
Earlier this month, investment firm Morgan Stanley said Apple (AAPL) has five “underappreciated” catalysts that could boost the stock higher over the next 12 months.
Alpha’s Quant System seeks to recently list Berkshire Hathaway (BRK.A) (BRK.B) as one of three strong buys in the financial sector.