Warren Buffett needs no introduction. ‘The Oracle of Omaha’ may be the world’s best investor, whose long career has pushed his net worth over $110b today.
Why is it then that Tim Cook, CEO of Apple (NASDAQ: AAPL), will send Buffett nearly $900 million this year? He certainly isn’t hurting for cash.
The Origin: A Billion Dollar Bet
The answer goes back to 2016, when Buffett’s Berkshire Hathaway (NYSE:BRK.A | BRK.A Price Prediction) made an unusual move that was widely criticized at the time. According to Berkshire’s 13F filings that was the first year Berkshire began acquiring shares in Apple. The company scooped up 9.8 million shares, then worth $1.07 billion.
It’s important to remember that this followed Buffett’s disastrous investment in IBM (NYSE:IBM) just a few years earlier.
Other luminary investors spared no mercy in their commentary:
IBM is a company in decline. It’s a company that’s been disrupted by the cloud and by the rise of new technologies like artificial intelligence and machine learning. Warren Buffett has made a big mistake investing in IBM. – Jim Chanos
IBM is a company that’s stuck in the past. It’s not innovating, and it’s not growing. Warren Buffett should sell his IBM shares and invest in something else. – David Einhorn
Buffett was largely considered ‘out of step’ with tech investments, with many suggesting he stick to railroads and candy. But as usual, Buffett would have the last laugh.
Apple’s Inflection Point
2015 and 2016 were important years for Apple. The company went from selling the flagship iPhone 6 to the 6S, both of which went on to be absolute blockbusters. The iPhone 6 became the third best selling phone of all time, and the 6S went on to be the fifth.
And both of these were set to be massive windfalls for investors. Just a few years earlier, in 2012, Apple not only instituted a dividend, but spent $43 billion buying back it’s own stock. It hasn’t slowed down on either since.
Buffett saw what was happening. He knew that when you combine a massive financial windfall from global blockbuster products with a declining share count, the results can be spectacular. But he wasn’t just betting on that one model cycle. No, he realized that Apple was becoming something beyond a hardware company. They were quickly becoming the operating system of people’s lives.
An $855m Fortune, This Year Alone
That’s why Buffett, a notoriously patient investor, has held his shares since then. He has benefited in all of the following ways:
- A declining share count since 2016
- A shift to services revenue (currently 20% of revenue and 34% of profit)
- Multiple expansion
- The growth of new products, like the AirPods
- Apple’s shift to build their own silicon
And the list goes on. His patience means that his initial investment of just over $1b has ballooned (after additional purchases) to over $150,000,000,000 today. Even at a paltry .57% dividend yield, that means Apple will send Berkshire Hathaway dividends totally $855,000,000 over the next twelve months.
You don’t have to squint too hard to see a time in the near future where Buffett is recouping his entire initial investment in Apple each year.
Chalk this one up as another win for ‘The Oracle’, who didn’t even buy his first iPhone until years after the investment.
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