To The Moon

By Jeff Santoro

KEY POINTS

• Buffett is drawn to companies with strong brands and increasing profits.
• Apple's CEO is the kind of leader Buffett is drawn to when choosing stocks.
• The iPhone maker is an example of paying a little more for a wonderful company.

The Oracle of Omaha's investing history makes it clear why he loves Apple

With a market capitalization of $2.5 trillion, Apple($Apple(AAPL)$ )is one of the world's largest companies. And one of Apple's biggest fans happens to be Warren Buffett, CEO of Berkshire Hathaway.

Since Buffett's lieutenants initially bought Berkshire's first 10 million shares in 2016, Buffett has come to appreciate Apple's business. He has since ditched his flip phone for an iPhone, continued to build Berkshire's stake in Apple, and heaped praise on the company.

Currently comprising nearly 40% of Buffett's portfolio, Apple represents Berkshire's third-largest holding. Let's take a closer look at why Buffett thinks Apple is the greatest company in the world.

A premier brand

If you look at the Berkshire Hathaway portfolio, it's clear that Warren Buffett sees the value in a company's brand. Some of the most recognizable brands in the world are held by Buffett. Most iconic is Coca Cola, a longtime holding of Berkshire's, and currently the fourth-largest investment in the portfolio. Buffett is known for his daily habit of McDonald's and Coke.

Berkshire's investment in Apple fits into this brand-driven focus as well. It's difficult to think of a more iconic brand within the tech sector, and if we look at it financially, Apple's brand is estimated to be valued at $947 billion.

This strong brand has helped Apple sell a wide variety of hardware devices, as well as a compelling ecosystem that has led to more and more recurring subscription revenue.

Over the first nine months of 2022, Apple has seen all but its iPad category grow revenue year over year. Interestingly, the leading category has been services, which has increased 18% over the same timeframe from 2021. This is important, as services consists ofhigh-marginrevenue like AppleCare, digital subscriptions, and payment services, helping with Apple's profitability and cash generation.

Profits galore

In 2018, Buffett was quoted as saying that Apple "earns almost twice as much as the second-most profitable company in the United States," while calling it an "unbelievable company" and regretting not buying it earlier. Not much has changed, as Apple is the most profitable company in the world.

In Apple's most recently reported quarter, it posted net income of $19 billion, and over the past 10 years it has increased its profits by almost 140%. In addition, Apple generates massive amounts of free cash flow that it uses to repurchase its shares. Over the past 10 years the company has reduced its share count by almost 40%.

In the 2021 Berkshire Hathaway annual letter, Buffett wrote that its share of Apple increased from 5.39% to 5.55% entirely from Apple's share repurchases.

A strong management team

In that same annual letter, Buffett heaped praise on Apple CEO Tim Cook, calling him brilliant and pointing out how Apple's shareholders benefit from Cook's devotion to Apple's customers.

That Buffett is drawn to Cook is not a surprise. Berkshire has a long history of acquiring companies and allowing them to operate independently with very little oversight from Buffett. At Berkshire's 1994 annual meeting, Buffett was quoted as saying, "The important thing we do with managers, generally, is to find the 400 hitters and then not tell them how to swing."

While this quote relates to businesses Berkshire acquires, it certainly is part of Buffett's attraction to Apple.

A wonderful company at a fair price

As an icon to value investors, Buffett is known for hunting for bargains. However, he's also famous for saying that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." This line of thinking applies to a company like Apple.

Apple may not always appear "cheap," but when the company is of Apple's quality, some premium is justified, even for Warren Buffett.