Warren Buffett should consider holding Apple for longer not because of iPhone sales but because of active installed devices.
Warren Buffett’s investment in Apple (NASDAQ:AAPL) is turning out to be one for the record books.
In under half a decade, the value of the investment has more than doubled. The stake that was acquired at a price of about $36 billion is now worth around $73 billion. Berkshire Hathaway (NYSE:BRK.A) is now Apple’s second-largest institutional shareholder, owning about 5.6% of the iPhone maker’s outstanding shares.
Disappointingly, Berkshire Hathaway has sold 3.65 million shares over the last two years at prices below the current figures.
Following Apple’s stellar Q1 2020 results, Buffett would be contradicting his investing philosophy if he doesn’t push the pause button on selling. The results proved that Buffett made the right call by investing in Apple in the first place. Continuing to sell would be a huge opportunity cost.
The key statistic that should keep Buffett holding Apple isn’t record iPhone sales. Rather, it’s the walled garden Apple has created, as well as the “royalties” the ecosystem will keep generating from old and new hardware already out there.
Among the criteria that Buffett employs to find an investment worth making is the competitive edge, or economic moat, of the asset. In the case of Apple, the competitive edge is undeniable. During the earnings call CEO Tim Cook revealed that the company’s active installed base of devices had risen by over 100 million in the last 12 months. It now stands at over 1.5 billion.
The advantage Apple has over rivals is cohesiveness. No other tech firm has integrated mobile, desktop and even wearables better than Apple. Google is largely restricted to mobile with its Android operating system while Microsoft dominates the desktop world. Does anyone see a competitor knocking the iPhone maker off its perch anytime soon?
As Cook admitted, the large number of active installed devices has and will continue to fuel Apple’s services business. The business includes Apple Music, cloud services, payment services, App Store’s search ad business and so on. Services revenue enjoys higher gross margins relative to iPhones, iPads, Macs and other Apple hardware.
The rise in services revenue and its future promise fulfills another criterion Buffett applies to investment – the growth potential of recurring revenues or royalties. In Q1 2020, revenue from services grew 17% to $12.7 billion. Six years ago the iPhone maker’s revenue from services was under $5 billion.
Services ensure the stickiness of the Apple brand, further aiding Warren Buffett’s “economic moat” argument.
Disclaimer: The above should not be considered trading advice from CCN.com. The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:32 PM