Image source: Apple.
If you only read headlines, you might be under the impression that Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) and a longtime eschewer of technology stocks, has added a $1 billion stake in Apple (AAPL 0.01%) to Berkshire's portfolio. That's partly true -- Berkshire does own a major stake in the iPhone maker, according to its latest filing with the SEC. But Buffett himself had nothing to do with it.
A portion of Berkshire's vast stock portfolio is managed by two investment managers, Todd Combs and Ted Weschler. As confirmed by Buffett in an email to The Wall Street Journal, the Apple investment was made by one of these managers, and Buffett played no part in the decision. While Buffett handpicked these managers, he allows them to make stock picks without consulting him, leading to situations where stocks are added to Berkshire's portfolio that Buffett would never buy himself.
Why Apple is not a Warren Buffett stock
Ignoring the fact that Buffett famously avoids technology stocks like the plague, on the surface Apple looks like it might fit in with Berkshire's other large stock holdings like Coca-Cola and Kraft Heinz. Apple has a very strong brand: the most valuable in the world, according to Forbes. Buffett likes to buy companies with durable competitive advantages, and a strong brand, if able to be maintained, is one way for a company to fit this mold.
Apple stock is also cheap, at least relative to current earnings. Apple trades for about 10 times 2015 earnings, and that multiple is even lower if the company's massive hoard of cash is backed out. Apple stock has been beaten down recently following the first year-over-year decline in iPhone sales, and Buffett has a history of buying shares of good companies at times when the market has turned against them. Price is what you pay, value is what you get, according to the Oracle of Omaha.
Despite these similarities with other Buffett picks, Apple is very much the opposite of what Buffett typically buys. Charlie Munger, Vice Chairman of Berkshire Hathaway, said as much in 2013:
"The whole world admires the achievements of Apple. On the other hand, you could hardly think of another business that is more un-Berkshire-like than Apple."
What makes Apple so un-Berkshire-like? It's the fact that Apple needs to constantly come up with new, innovative ideas. Apple's competitive advantage can only be maintained if the company keeps innovating, giving its massive base of users a reason to upgrade to new Apple devices. And whatever ends up being the next big thing, be it virtual reality headsets or some unforeseen future gadget, Apple needs to be leading the charge. Coca-Cola, in contrast, doesn't need to come out with brand new sodas every single year in order to keep its customers loyal. Its namesake beverage has remained largely unchanged for over a century.
Buffett generally doesn't buy technology stocks because he can't predict earnings very far into the future. Tech companies, and especially makers of consumer gadgets, are easily disrupted by new technological developments. Buffett prefers companies that are very unlikely to be upended by technology:
"Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like."
How much profit will Apple earn ten years from now? Twenty years from now? Will smartphones still be a thing in 2030? Will iTunes still be terrible? Will people continue to shell out $650 for new phones every two years when year-to-year improvements are minimal, and when a $300 phone is nearly as good? None of these questions have obvious answers, and that makes investing in Apple risky despite its low valuation.
Buffett gives his investment managers the freedom to buy stocks that he himself would never buy. Berkshire holding a stake in Apple is not proof that Buffett has changed his tune on technology stocks, or that Apple has an unassailable economic moat. Despite its strong brand, massive user base, and exceptional profitability, Apple is not a Warren Buffett stock.
