Apple is Buffett’s biggest holding, but his thesis is facing questions

Berkshire HathawayWarren Buffett was still using a flip phone as late as 2020, four years after his investment behemoth began amassing a massive stake in the company that makes the iPhone.

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

It has emerged in recent years as one of the of Apple 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 the size of Berkshire’s second-largest shareholding, Bank of Americaand makes the company Apple’s No. 2 shareholder, behind only Vanguard.

As Berkshire investors and fans 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 overall revenue. But the stock had its best day since the end of 2022 on Friday, thanks in large part to a $110 billion share buyback plan and increased margins that resulted from a growing services business.

The bet on Apple and CEO Tim Cook paid off handsomely for Buffett, who said in 2022 that Berkshire’s stake in Apple would be worth just $31 billion. His firm is up nearly 620% on its investments since the start of 2016.

Although a self-described Luddite, Buffett has long had a consistent non-technological love for Apple. He saw how devoted Apple users were to their devices and saw the iPhone as an exceptional product that could get his customers to spend within the Apple ecosystem. He calls it a moat, one of his favorite words to describe his preferred business.

“Apple has a position with consumers that they pay $1,500 or whatever for a phone, and those 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 their iPhone, they would give up their second car!”

The data is in his favor. According to a study by Consumer Intelligence Research Partners, Apple enjoys a 94% customer loyalty rate, meaning that nine out of 10 current iPhone owners in the US choose another iPhone when purchasing a new device.

Buffett also hailed Apple’s ability to return billions of dollars to shareholders annually through share buybacks and dividends, a capital allocation strategy the billionaire investor has himself to thank for. When the Apple CEO was asked in a 2016 interview with The Washington Post who he turns to for advice at key moments, Cook offered a story about his relationship with Buffett.

“When I was crossing [the question of] what should we do about returning money to shareholders, I thought who can really give us great advice here? Who wouldn’t have a bias?” Cook said. “So I called Warren Buffett. I thought he was the individual.”

Apple showed 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 newsman rides a bicycle from Omaha to Apple’s hometown of Cupertino, California.

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

Buffett reduced his stake in Apple late last year, though only by about 1%. Even after Friday’s rally, stocks are down 3.8% in 2024, while the S&P 500 is up 7.5%.

At last years annual meeting, when asked how Berkshire could protect Apple from making up such a large part of its public portfolio, Buffett said, “It just happens to be a better business than any that we own.” He also praised Cook, calling him a of “the best managers in the world”.

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

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

In addition to the decline in revenue, Apple faces new challenges from regulations and weak overseas markets, as well as Microsoft and on Google advances in artificial intelligence. For regulators, the concern is about itself moat what Buffett finds so attractive and whether it gives the company a monopoly on the smartphone market.

The US government in March alleged that Apple designed its business to keep customers locked out. The Justice Department’s lawsuit alleges that products like the Apple Card, the Apple Arcade gaming subscription, iMessage and the Apple Watch work best or only with the iPhone, creating illegal barriers to competition and making it difficult for consumers to switch when it’s time to upgrade.

However, the litigation is expected to drag on for years, pushing any potential sanctions against Apple and its products into the future. Meanwhile, there are no signs that the iPhone is becoming less important, as new devices such as virtual reality glasses have found only a niche audience while consumer AI products have failed to take off.

Buffett has not publicly expressed his views on Apple’s regulatory hurdles, and this will be the first opportunity for investors to ask him about the issue since the DOJ case. But Buffett knows little about regulation — two markets in which he is most active are railroads and insurance.

In a note to clients earlier this month, Bernstein analyst Tony Sacconaghi did not delve into the regulatory concerns, but said he did not believe the DOJ case would “seriously threaten” the strength of Apple’s ecosystem. He also said that following Buffett’s lead for 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 in adding to his Apple position when it is relatively cheap and cutting when it is relatively expensive,” Sacconaghi wrote. He encouraged investors to “be like Buffett.”

“The math of buybacks is slow to digest, but can be powerful over time,” Buffett said in 2021.

Apple also increased its dividend by 4% and signaled that it will continue to increase it every year.

Buffett raved about the tech giant’s capital return strategy at the conglomerate’s annual meeting last year, pointing out that it has helped Berkshire own a bigger slice of the pie. Unlike insurer Geico and homebuilder Clayton Homes, which his firm wholly owns, Berkshire can continue to grow its stake in Apple, a fact he reminded investors at the meeting.

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