Making Sense of Berkshire’s Bite of Apple

SMITH BRAIN TRUST — Berkshire Hathaway’s small but much-discussed bite of Apple suggests a vote of confidence for a tech giant that had been sliding in the stock market. It also hints at how Warren Buffett’s holding company will do business after the 85-year-old "Oracle of Omaha" no longer is there, says clinical professor of finance David Kass at the University of Maryland’s Robert H. Smith School of Business.  

Revealed Monday in a regulatory filing, the roughly $1 billion investment of 9.8 million shares represents about 1 percent of Berkshire’s $129 billion portfolio value. It also comprises about 0.2 percent of Apple’s shares outstanding. “I certainly did not expect this investment. but from a value investor point of view it makes some sense,” Kass, a Berkshire shareholder and a close follower of Buffett's investment strategy since 1980, told the Washington Post.

Buffett confirmed that his portfolio managers at Berkshire decided to purchase the stock. Historically he has passed on investing in tech companies — apart from a $12 billion stake in IBM made in 2011, which has substantially underperformed the S&P 500 since then — due to the difficulty of projecting stability and growth in an environment of rapidly changing technology. Apple shares have fallen by nearly one-third since April 2015. But that factor made it palatable to Berkshire as a value investment. “It appears to be a low-risk investment with considerable upside potential,” Kass told the Wall Street Journal. “(Berkshire portfolio managers) Todd Combs and/or Ted Weschler … perhaps have a better understanding of the competitive advantages Apple possesses vis-a-vis the technological challenges it might face in the years ahead.”

Apple at the Plate

As Apple shares climbed nearly 4 percent in trading Monday to $93.88, observers noted the stake signals Berkshire’s confidence in Apple’s ability to create new products that reignite revenue growth. But P.K. Kannan, the Smith School’s Ralph J. Tyser Professor of Marketing Science, says the recent fall in Apple stock reflects market concern that Apple does not have enough in its research and development portfolio in terms of innovations. “The market will watch the introduction of iPhone 7 for sure," he says. “But the market is saturated and whether it will reignite the growth is not so certain.”  

Look for Apple’s growth to come from other, current and future investments, Kannan says. “The (Chinese ride-sharing company) Didi Chuxing $1 billion investment is a good move, but it is, again, in a market where Apple got shut out for its content products.” (See Apple movies and iBooks shut down in China.)

“Berkshire's investment in Apple shows confidence, especially given the move happened in March before the stock fell,” he says. “Apple should by looking to repay the confidence and the market belief in its innovative ability. The payoff for Apple’s recent forays into autonomous driving (tied to Didi) and virtual reality technology is further on the horizon and it will be interesting to see what Apple may do in terms of further investment with its massive cash pile.”