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The big news in the past week was that Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) increased its investment stake in technology giant Apple (NASDAQ: AAPL) by 55%. According to a recent 13-F filing with the SEC, Berkshire Hathaway now owns 15.2 million shares, up from 9.8 million.
This was a surprise, given that Buffett has historically shied away from investing in technology companies, outside of Berkshire’s significant investment in International Business Machines (NYSE: IBM). But the investment makes a great deal of sense. Value investors may want to follow Buffett’s lead.
Oracle of Omaha Takes a Bigger Bite
Apple is constantly dogged as a company losing its innovative magic; critics say it sells a commoditized product that is too big to grow in the future. But this year, Apple has proved its doubters wrong. The company is enjoying some positive momentum with strong earnings.
Last quarter, Apple generated $1.42 per share of profit on $42.4 billion of revenue. These results beat analyst expectations, which called for $1.38 of EPS and $42.09 billion in revenue. The biggest reason for Apple’s surprisingly strong performance is the iPhone, which few had expected. Apple sold 40.4 million iPhones last quarter, beating the 40.02 million unit sales that Wall Street had expected.
Buffett has largely resisted investing in technology companies; he has a stated preference to invest in companies that are easy to understand. But Apple is far from a speculative tech start-up with a complex and confusing business model. Instead, Apple has a clearly defined path forward for future growth.
Apple Growth Propelled by iPhone, Services, Emerging Markets
Not only does Apple have the next major iPhone cycle to look forward to, but Apple growth will also be propelled by its services business, as will its growth in new geographic markets.
Apple growth has already sprung from emerging markets, particularly China, which recently surpassed Europe to become Apple’s second-largest operating geography behind the Americas. Growth in its China market will propel Apple’s earnings, as will penetration in new markets such as India.
Apple has just 3% market share in India presently, and the company is making a big market share grab there with the March release of the iPhone SE, a lower-cost model that is designed specifically to compete with low-end devices in India. Apple has enjoyed strong results of the SE so far, which was one of the reasons why iPhone unit sales beat analyst expectations last quarter.
Lastly, services are another key future growth catalyst for Apple. Services revenue increased 19% last quarter and hit a company record. App Store revenue soared 37% last quarter. Over the past 12 months, Apple’s services revenue eclipsed $23 billion.
Apple has a well-defined runway of growth up ahead, and the company has enormous financial resources that can be used to pursue any future opportunities that come along. Apple ended last quarter with $231 billion in cash, short-term marketable securities, and long-term investments on its balance sheet.
Buffett Sees Bargain in Apple Growth
With such compelling growth potential, it’s no wonder why Buffett has finally invested in the stock. Furthermore, as arguably the most famous value investor of all time, Buffett has a track record of buying stocks that are undervalued. Apple is perhaps one of the best value opportunities in the entire market.
Apple stock trades for a P/E of just 12. It is an extremely cheap stock, given the fact that the S&P 500 Index as a whole trades for an average P/E close to 20. In addition, the stock is attractive for investors who like dividends. Apple offers a 2.1% dividend yield and the company has stated its intention to raise the dividend by 10% per year going forward.
If Apple is successful in its attempts to grow sales and earnings by penetration in emerging markets and its new product line, the price Buffett is paying today may be seen as a great bargain.
Disclosure: The author is personally long AAPL, IBM.