It's no secret that Warren Buffett is a huge fan of Apple (AAPL +1.17%). Through Berkshire Hathaway, the Oracle of Omaha first purchased shares in the iPhone maker in the first quarter of 2016. This has become one of Buffett's greatest investments, and it represented 44% of Berkshire's portfolio at the end of 2022.
There's another prominent investor across the Atlantic Ocean, known as Britain's Warren Buffett, who is starting to warm up to the popular tech stock as well. U.K. fund manager Terry Smith, through his investment vehicle, Fundsmith, bought Apple stock for the first time in the third quarter last year.
Smith has a wonderful track record, so does his latest purchase mean you should buy shares, too?
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Hate, then love
Terry Smith wasn't always a fan of Apple. He didn't like how the company was so dependent on iPhone sales for its success, which did represent 56% of overall revenue in the most recent quarter, Q1 2023, which ended Dec. 31. And he didn't like that the business constantly had to upgrade the same product and hope that customers would continue to pay up for it. He concluded that this would be another commoditized consumer hardware failure like Nokia, something Smith knows about well. Nokia also tried to sell itself as an entire ecosystem in the 2000s, and it didn't work out well.
The other concern for Smith was that he believed Apple's past success was largely the result of the genius of Steve Jobs. But after rethinking his views, Smith came to the conclusion that Apple is indeed an exceptional business.
Smith loves companies that have a source of recurring revenue. And that's why he's now fond of Apple. The company's services segment, whose popular offerings include iCloud, Apple Music, and Apple Pay, is doing well. Sales of $20.8 billion were up more than 6% in the latest quarter, when the products segment posted a decline. And services revenue has jumped 63% over the past three years, showcasing monster growth. This segment carries a stellar gross margin in excess of 70%.
This is an ecosystem that attracts customers with its fantastic hardware products and keeps them engaged with its valuable services. Apple, in short, has stickiness and loyalty, with more than 2 billion active devices worldwide. And even more impressive, the company's customer base is more affluent, allowing Apple to flex its pricing power, as this group is willing to pay a premium.
And when it comes to Tim Cook's performance thus far, it's hard to understate his success. Apple's share price is up more than 1,000% since he took over the CEO role in August 2011, thanks to burgeoning sales and profits. He's spearheaded the company's push toward services, while also launching hugely popular hardware products, like the AirPods and the Watch. And Buffett has called Cook a "fantastic manager." That's a pretty good endorsement to have.
NASDAQ: AAPL
Key Data Points
Following the right fund managers
Without question, following successful fund managers, specifically by looking at their quarterly 13-F filings, can be an effective strategy for individual investors to boost their portfolio returns. But it's critical that you make sure to pick the right investment managers in the first place -- those that have the same philosophy of putting money to work for the long term. Buffett certainly fits this category.
And Terry Smith undoubtedly falls into this category as well. His fund is known for having extremely low turnover on a yearly basis, with his overarching portfolio management strategy being to buy good companies, not overpay for them, and do nothing. This approach has resulted in an annualized return of 15.8% since Fundsmith's inception. This could be a good sign for other investors to consider buying Apple stock.
