Why Isn't Warren Buffett Buying Apple Stock?

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 (NASDAQ: AAPL  ) 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 (NYSE: 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 (NASDAQ: GOOGL  ) 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 (NASDAQ: MSFT  ) 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.

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Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 17, 2013, at 11:04 PM, ScottAtlanta wrote:

    lol...there is no moat. The raiders have scaled the "first mover" wall and are in the village....they're raping and pillaging. Wake up.

  • Report this Comment On April 18, 2013, at 5:08 AM, nanarchy wrote:

    why isn't he buying? perhaps because unlike this article he isn't blind to the massive risk? apple is a company 100% reliant on consumer sentiment and at the moment that sentiment is slowly swinging away from it. perhaps they can get it back or perhaps they are in for a big crash. Either way the risk is very real and very large.

  • Report this Comment On April 18, 2013, at 6:58 AM, EquityBull wrote:

    Buffett needs great managers and leaders. Tim Cook does not meet this criteria. He has destroyed the apple brand in under a year. Apple could have bought either Microsoft or google just with what it lost in market cap these last few months and had another 50 billion to pick up a few more companies

    Buffett won't invest in losing and incompetent overpaid management and executives that also own none of their own stock

  • Report this Comment On April 18, 2013, at 8:38 AM, demodave wrote:

    EquityBullStuff, Cook has not destroyed Apple's *brand*. The Market (and its vrious machinations and manipulations) has done a pretty good job destroying AAPL, but that's not the same thing as Apple or the Apple brand.

    Travis, Buffett has been very clear: he doesn't buy AAPL because he does not understand Apple. Don't be a tool and claim that you know better what Buffett should do than Buffett himself.

  • Report this Comment On April 18, 2013, at 9:06 AM, SaraW946 wrote:

    I disagree both with the article and most of you. Warren Buffett would not buy Apple under Steve Jobs, and he won't buy it under Tim Cook either. Moreover, he has openly explained why he doesn't do so. Last, but not least, the basis of this article is wishful thinking, while its purpose is to join forces with those who see Buffett as Apple's savior, not to mention to encourage others to buy Apple, seeing that the author has lost major money after buying the stock himself. :)

    This is not how the markets work, people! :)

  • Report this Comment On April 18, 2013, at 9:16 AM, Raphael1990 wrote:

    1. Apple doesn't have a moat. They enjoyed their first mover advantage in smartphones and tablets for a couple of years, but that is just an illusion of a moat.

    2. Consumer electronics is a freaking battlefield and the margins are the civilians. No big long term profits to be made there.

    3. I dont like their attitude towards shareholdervalue. At 400 USD per share with 140 cash per share they could buy back 140 Billion/(400-140) > 500 Million!

    And they are doing nothing...

    Becasue of points 1 and 2 Apple is more than questionable as a "buy and hold". Because of the depressed price and the chance that they will eventually unleash their cash, it is a t least a good trade for the next 1-2 years.

  • Report this Comment On April 18, 2013, at 9:54 AM, luckyagain wrote:

    Look at the companies that Buffett buys, companies that have a long history of performance and constant products. Apple being in the tech field fails both of these requirements. Any company that has to produce new products every few years in order to stay in business is not a company that Buffett wants to own. Buffett likes "boring" companies that make money, Apple is a tech company that depends upon "flash" for its survival.

  • Report this Comment On April 18, 2013, at 10:34 AM, abc124 wrote:

    Because Warren Buffett knows more than you.

  • Report this Comment On April 18, 2013, at 10:53 AM, alan0101 wrote:

    Appalling lack of business and investing acumen in most of these comments. And as an investor, WEB would say you have to leave emotion out of it. Therefore, comments about Jobs vs Cook, moat or no moat, pricing, "shareholder value" (now there is an outdated concept along with Rogoff and his austerity ideas..) The only thing that is going on, is that Wall Street talks the stock up, then down, makes money both sides and laughs at those who lose money, or blow a lot of hot air on boards (me included) The media who are no longer independent (eg the WSJ) and the "analysts" gladly and unprofessionally help the process.Apple does too, by not doing even the minmal PR. Jobs HATED shareholder meetings and all the BS around analysts. food for thought.

  • Report this Comment On April 18, 2013, at 11:02 AM, CharlieTX wrote:

    What a load ... the market share numbers quoted are only for the USA. The China market alone eclipses the USA market, and then you add in the remainder of the world. Android has over 70% market share and is growing while Apple has stagnated, which is why their stock is dropping like a rock. Warren Buffet isn't buying because he is smart and won't be taken in by a writer who probably has Apple stock he wants to dump if he can just get the stock price back up.

  • Report this Comment On April 18, 2013, at 11:53 AM, Auxetophone wrote:

    Coca Cola is nothing like Apple. Coke buyers have to replace their existing Coke whenever they get thirsty, and the need for innovation is almost nonexistent.

    Apple has a big job to do if they want iPhone users to keep upgrading every year - all the more so when the competition is raising the stakes every few months.

  • Report this Comment On April 18, 2013, at 4:58 PM, WineHouse wrote:

    I find myself rolling over with laughter every time I see a comment about AAPL -- the company -- going down the tubes just because AAPL -- the stock market price per share -- is being manipulated on Wall Street by the hedge fund managers. Even the biggest sleaze ball hedge fund manager on Wall Street can't bring AAPL down to its knees -- because of all the cash it has on hand. Even if it has to repatriate that cash, the 65% after-tax repatriated $$ would be nothing to sneeze at. Now somebody is hinting that AAPL is "about to issue a large amount of debt" -- huh? Would YOU go out and borrow a lot of money when you have a huge amount in the bank already? And even though most of AAPL's money is overseas and subject to repatriation tax, the fact is that there's plenty of inside-the-USA money in AAPL's coffers. Do those hedge fund managing idiots really believe that they can "bring Apple to its knees" by driving the stock price down? Even if they were to form a huge cabal -- Einhorn plus Pelz plus Icahn plus you-name-him -- they wouldn't be able to do a leveraged buyout and pillage Apple's coffers (despite their fondest dreams and hopes). Most people who hold AAPL shares are either traders who won't hold them long enough to have voting rights, or they're smart enough to know better than to go along with that kind of malarkey. At some point, one of those hedge fund managers is going to break loose from his short positions and scoop up the "bargain" -- the tide will turn, and a lot of ordinary trader folks will have been burned once again.

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