Why Warren Buffett is bullish on tech
The Oracle of Omaha is reversing his one-time aversion to technology stocks.
Warren Buffett's Berkshire Hathaway (BRK.A) has taken a new $1 billion position in Apple Inc. (AAPL), making the stake at a time when the company's stock has sunk below $100 per share as it deals with slowing iPhone sales.
As the world's best-known value investor, Buffett has made his fortune on the backs of so-called value stocks, or companies whose shares are selling below their intrinsic value and which offer long-term potential. But Buffett has long avoided tech stocks, arguing that they often don't have a defensible competitive position, and that it's difficult to identify the winners and buy them at a cheap price.
So why buy Apple now? For one, the tech giant's valuation is at its lowest in a decade, making it more appealing to value-seekers like Buffett. The shares had declined about 15 percent this year through Friday, giving it a price-to-earnings ratio of about 10, far below the S&P 500's P/E ratio of almost 24. One could also argue that Apple is now straddling two types of sectors because its devices are so ubiquitous, becoming a hybrid tech company and consumer products firm.
"Apple at the current valuation makes a ton of sense; it's a consumer-product company more than a tech company," investor Jeff Matthews, who has written books about Berkshire Hathaway, told Bloomberg News. "The company has a great financial model, a great brand name and a cheap stock."
Berkshire Hathaway held 9.81 million Apple shares as of March 31, according to a regulatory filing. That was worth about $1.07 billion at the end of the first quarter. With the news of Buffett's stake, Apple's stock jumped on Monday morning, rising about 2.4 percent.
The company also upped its stake in IBM (IBM), another battered tech icon, buying nearly an additional 200,000 shares in the first quarter. Berkshire's stake in IBM is now almost $12.3 billion.
There are signs that Buffett might not be done with tech companies yet, given that he's considering backing Quicken Loans founder Dan Gilbert and other investors in a bid for Yahoo's (YHOO) Internet assets.
"I'm an enormous admirer of Dan and what he has accomplished in Quicken Loans. Yahoo is not the type of thing I'd ever be an equity partner in," Buffett told CNBC. "I don't know the business and wouldn't know how to evaluate it, but if Dan needed financing, with proper terms and protections, we would be a possible financing help."
Yahoo, like Apple, has fallen out of favor with investors, although Yahoo's core business is in much more dire shape. Revenue at Yahoo has stagnated since 2012, while its share of the digital ad market is declining. Yahoo solicited offers for its assets after pressure from activist investors who were frustrated by the company's inability to turnaround its business.
One thing that Apple, IBM, and Yahoo share: well-known brand names. That's often key for Buffett, who likes to invest in household brands such as Coca-Cola and Geico.
By that measure, Apple holds its own as one of the world's most recognizable brands. Whether it can regain its shine with investors remains to be seen.
Jon Berr contributed to this report.