Berkshire Hathaway has compounded shareholder capital at nearly 20% annually since the 1960s. Such a fantastic track record means the conglomerate is doing something right. And investors take notice.
It all comes down to capital allocation, something the great Warren Buffett, longtime CEO of Berkshire, is great at. His skills are still apparent, as he made one of the best bets of his career in 2016 when he purchased a dominant tech titan that today represents 24% of Berkshire’s massive $303 billion portfolio.
Continue reading to learn what business this is, why it caught Berkshire’ attention, and whether or not it’s a smart buying opportunity right now.
Berkshire Hathaway first bought Apple (NASDAQ: AAPL) shares in the first quarter of 2016. That was a wildly successful decision, as the “Magnificent Seven” stock has soared 797% since the start of that year (as of Jan. 31).
It’s not difficult to figure out what drew Buffett’s attention back then. He appreciates high-quality businesses, a category that Apple definitely falls into.
Buffett understood that Apple is, at its core, a powerful consumer brand. A storied history of innovation, exceptional product design, and ease of use made its devices unbelievably popular across the globe. The Apple brand has incredible mindshare.
This has led to proven pricing power. Buffett has said the ability to raise prices with no pushback from customers is a hallmark of an outstanding business.
Apple’s services segment, which offers up things like iCloud, Music, Pay, Card, and TV+, among others, is becoming a more important revenue and profit driver. But maybe more importantly, the combination of hardware and software is precisely what makes up Apple’s powerful ecosystem.
Even nearly a decade ago, Apple was reporting outsize profits. Its net profit margin in fiscal 2015 was a stellar 23%. And it was raking in sizable cash flow at the time, something that’s true today. This kind of pristine financial position, bolstered by a strong balance sheet, probably made Berkshire even more comfortable buying a stake, as it reduced risk.
During the first three quarters of 2016, Apple shares traded at an average price-to-earnings (P/E) ratio of 10.6. With the benefit of hindsight, it’s now clear the market was offering up an absolute bargain for Berkshire to take advantage of.
Over the course of 2024, Berkshire has been reducing its Apple stake. During the 12-month span from the fourth quarter of 2023 to Sept. 30 last year, the conglomerate unloaded 615 million outstanding shares, or about two-thirds of its holding.
