Warren Buffett has never been much of a tech investor; in fact. he famously sat out of tech during the Internet bubble. But he has been willing to venture outside his normal comfort zone when a profitable opportunity arises. He has made investments in an electric-car company, a small time-share airline, wind and solar power plants, a company that rents furniture, and a company that sells party supplies -- none of which are companies that have "Warren Buffett" written all over them.
So why isn't Buffett buying Apple (AAPL -0.35%) stock right now? It may be in tech, but it fits most of the criteria he has followed his whole career. It has a wide competitive moat, a strong return on investment, and a great brand. And it's cheap, even by Buffett's standards.
A moat as wide as the Mississippi
In every business Apple operates in, it has a competitive advantage and an ecosystem that keeps users coming back for more.
Take the PC as an example. PC sales are falling across the industry, and Apple is only the sixth largest PC maker in the world. But Apple generated more operating profit than the top five PC makers combined (click here to see the graphic from Asymco). Apple is able to command a premium because its computers are more reliable and more elegant than the competition, and that means profits for investors.
In mobile, the iPhone is still the best-selling smartphone on the market, and according to ComScore, Apple increased its market share from 35% in November to 38.9% of the market in February. In tablets, IDC expects Apple to garner a 46% market share in 2013 and grow 15% annually through 2017. These two dominant products feed on each other with iCloud and iTunes, sucking customers in and keeping them in the ecosystem.
If we look at the potential growth in smartphones and tablets along with a very profitable PC business, Apple has a lot of room for growth, which is what makes it stock value so appealing.
Downside protection on Apple stock
We know that Warren Buffett isn't a fan of taking risk, and Apple is anything but a risk right now. Apple's market cap is currently $400 billion, and at last count it had $137 billion in cash, which will jump another $15 billion or so when the company reports earnings next week. When we look at value from an earnings perspective, Apple stock trades at a forward P/E ratio of just 8.6 even before we pull out all of that cash.
If you prefer to determine value by cash generation -- Apple generated $47.4 billion in cash over the past year, and if it generates the same free cash flow going forward, it would generate enough cash to equal its market cap by June 2018, just a little more than five years from now. Let's not forget that Apple's biggest markets -- smartphones and tablets -- are still growing like a weed, so it could easily pick up cash flow generation.
A brand for the ages
What seals the deal and makes Apple a stock Warren Buffett should buy today is the company's brand. One of the most famous investments of Buffett's career is his large stake in Coca-Cola (KO), and Coke's competitive moat is its brand. Anyone can make a syrup and sell it to bottlers, but Coca-Cola is able to command a premium for its drinks because consumers around the world can expect the same taste from that little red can.
A strong brand is one of Buffett's favorite moats. Fruit of the Loom, Dairy Queen, See's Candies, and Helzberg Diamonds are just a few of the companies Buffett owns that could be overtaken by a thousand different competitors if it weren't for their strong brands.
In tech, Apple has a superior brand, and there are only a few companies that could conceivably compete with Apple in PCs, smartphones, and tablets. We're getting to the point where scale matters, and so does the ecosystem of apps you're able to build. Google (GOOGL 10.22%) has been able to build an ecosystem to rival Apple, but companies such as Palm and BlackBerry have failed trying to keep up. Even the mighty Microsoft (MSFT 1.82%) is struggling to keep up with Apple, and one reason is that Apple's brand and ecosystem combine to form an impenetrable force.
Foolish bottom line
I think Apple stock is a perfect pick for Warren Buffett or even the two proteges to whom he's given billions of dollars to manage. The brand, large competitive moat, and great value are too good to pass up. The market is very fearful that Apple has lost its magic touch, which is when Warren Buffett should be greedy and scoop up as much Apple stock as he can.
