Buffet’s CEO Berkshire Hathaway shows interest in Apple by constantly increasing his bet on the company.
Warren Buffett’s Berkshire Hathaway purchased a $1.7 billion stake in Apple. Increasing the previous estimation by 55% in August 2016. Many guesses were made regarding its rationale. The gamble hinted at Berkshire’s confidence in Apple’s ability to create new products for a reason. According to present statistics, Berkshire owns 15.2 million shares. That is nearly 0.4% of Hathaway’s overall market capitalization. Buffett and Munger hold a number of marketable securities. The position of Apple compared to them is quite low. Though the company seems the next target of the huge American business magnate. Some of the reasons are below.
The value of the company:
According to its previous investments, Warren Buffett has two main factors for deciding whether a company is valuable enough to invest. First, determining the owner earnings. Second, the net income of the business for non-cash items. Meanwhile, Apple’s progress in terms of its owner’s earnings is quite impressive.
“Apple at the current valuation makes a ton of sense; it’s a consumer-product company more than a tech company. The company has a great financial model, a great brand name and a cheap stock.” says Jeff Matthews, an author of Berkshire-related books.
For one thing, the current value of a company is estimated based on the possibility of cash flow it generates in future. Not what its performance was like in the past. The results in the past have been truly amazing. Though that does not guarantee greater, or similar cash flow in the coming months. Moreover, sales in the smartphone market are maturing. The fact can mean lower cash flow for Apple. However, if results are not achieved in future, conservative estimates can provide safety. The process makes rough estimates for Apple.
This estimate can be inaccurate in the short term because of potential credit contractions or macro events. However, the same does not go for long-term expectations. Going for a more conservative path for future cash flows to assume estimates, a discount cash flow model provides an annual estimated return of 11%. This is true when Apple lies at $113 per share.