Buffett Bobs for Apple Bargain
Warren Buffett is famous for shunning investments in technology companies. He says he doesn't understand them, and he doesn't like betting his money on fairy dust and hope. At the 1999 Sun Valley technology conference, Buffett cemented his reputation for tech distaste by scolding the leading lights of the dot-com boom about the absurdities of their richly valued companies. He was right.
And then on Monday, Buffett's Berkshire Hathaway disclosed a $1 billion investment in Apple. Which you may notice is a technology company. And yet the fresh investment shows how much Apple is unlike most other tech companies.
As much as Buffett is known for his dislike for tech companies, he also is known for loving a bargain -- and for stoking his reputation as the stingiest billionaire in the world. That's why he makes a show of eating at Gorat's steakhouse, where a T-bone big enough for two costs $39. That's why his license plate at one point read "Thrifty." 1 And that may explain why Buffett or his stock-picking lieutenants are piling into Apple at a point when it's unloved among the growth-obsessed tech masses.
Apple has little in common with the dot-com stocks that Buffett couldn't understand and whose valuations were unjustifiable. Apple is basically the stock investment equivalent of Dumpster diving. The company's shares are trading at about 10 times earnings from the last year, nearly half the valuation of the S&P 500 index, Bloomberg data show. It is the widest gap between the S&P 500's price-to-earnings ratio and that of Apple since 2000 -- even before Steve Jobs started selling the iPod.
Yes, Apple at this point has stopped growing and the company's executives are playing defense. And it's unclear when or whether the company can kick-start the go-go sales that helped make Apple the most valuable company in the world by stock market valuation. But Apple at this point isn't a typical speculative tech bet. It's a giant pile of profits plus a bank vault of cash that happens to be attached to a company that sells phones.
Apple is more profitable than any other company in the S&P 500 index by a mile. The company's $10.5 billion in net income for the March quarter was more than the yearly profits of all but 15 companies in the S&P 500, according to Bloomberg data. Apple's operations in the same period brought in an average of about $300,000 in cash every minute. The company is on track to buy $175 billion of its own shares -- more than the stock market value of Disney.
There's no way for sure to know whether Buffett himself is responsible for the investment in Apple or whether it's one of the two money managers he has hired in recent years. Todd Combs and Ted Weschler tend to make investments of less than $1 billion in each company, my Bloomberg News colleagues wrote. The value of the Apple holding is right on that line. Combs and Weschler are no stranger to media and tech-like investments, with current or previous bets on Tivo, DirecTV and other un-Buffett companies. (UPDATE: Buffett told the Wall Street Journal that one of the lieutenants made the Apple investment.)
Even if Buffett himself made the Apple investment, the tradition-bucking tech bet would have a recent historic precedent. And Apple investors may cringe at the comparison.
Nearly five years ago, Buffett disclosed that he had invested more than $10 billion on another tech company, IBM. The company, not unlike Apple, had enviable streams of cash coming in the door. But IBM hasn't been a great bet. Soon after Buffett's investment, IBM slipped into a sales slump from which it hasn't recovered. Shares of Big Blue have declined about 21 percent since Buffett disclosed his stake.
Let that serve as a note of caution for stock jockeys piling into Apple on Buffett's heels. The Oracle of Omaha is playing a game far different from the one played by the Apple fans sitting down to their eTrade accounts. Buffett can afford to be extremely patient about his investments, and he delights in the torrents of cash from his investments' stock dividend payouts or stock repurchases. Most investors are not Buffett, and his firm's faith in Apple may not mean the company returns to its winning ways.
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