Why is Warren Buffett Buying Apple (AAPL) stocks?

Warren Buffett is taking a bite out of Apple. Buffett’s company, Berkshire Hathaway, disclosed in a recent regulatory filing that it has purchased more than 9.8 million Apple shares (AAPL) during the first quarter of 2016. Berkshire bought the stock at an average price of $109 per share. Roughly a billion dollars invested sounds like a lot of money to the retail investor, but this is a relatively small position for Berkshire Hathaway.

Buffett is well known for his lack of investments in the technology sector. But his new interest in Apple brings confidence to the stock that had been beaten down 14% since the beginning of the year. The price of AAPL, which fell to a new 52 week low on Thursday last week, shot up 4% on Monday thanks to the news of Berkshire’s stake.

The reasons Buffett decided to buy Apple for Berkshire Hathaway shareholders might be due to Apple’s strong economic advantages and the fact that its share price recently dropped, making the company more attractive from a valuation point of view. It might not seem like it at first but Apple has a lot of qualities that Buffett looks for in an investment. Apple is a leader in its market and holds the title of the world’s largest company by market cap, with Alphabet (Google’s parent company) at a close second place. Apple also has an impeccable balance sheet with $233 billion in cash. That’s more than enough to buy IBM in full. So Berkshire basically spend half their purchase on cash, and the other half on a technology giant. The cash component of Apple lowers the investment risk. The price to earnings ratio of just 11 times also makes AAPL a rather compelling buy. Apple has also increased its dividend payments every year since it began distributing them to shareholders starting in 2012. Continuously growing its dividends will make Apple a very attractive investment option for dividend growth investors such as myself. More people are realizing just how powerful rising dividends can be, especially when compounded over time, which is probably why the dividend growth strategy has become very popular recently among retail investors.

Of course not everything is going well for Apple right now. It’s currently facing a lot of challenges. Corporate profits in the U.S. as a whole have been disappointing lately. Apple (AAPL) recently said its revenue fell for the first time in 13 years due to a decline in iPhone sales compared to the same time last year. Apple shares are worth 27% less now than a year ago. Investors are warned the decline will likely continue. 🙁 Other publicly traded companies are experiencing similar challenges. Top line growth is slowing down, and its becoming harder to maintain profitability levels. Earlier this year in January U.S. employers announced over 75,000 job cuts, which was 218% more than the previous month. If consumers don’t have jobs then they can’t afford to buy new Apple products and services. It also doesn’t help Apple that smartphones are becoming saturated in the world. Most of Apple’s revenue comes from its iPhone sales so it’s top and bottom lines rely heavily on the future sales of its mobile devices. The problem is that in western markets roughly 60% to 80% of those who want a smartphone already have one. Even countries such as China, which at one time had a voracious growing demand for iPhones, is starting to experience market saturation as well. For most people having a 1 or 2 year old phone is still adequate to take photos, check Facebook, text, call, and browse the internet. Smartphones are so powerful and full of features today that it’s not practical or necessary for most consumers to spend $800 on a new phone every year. The only remaining parts of the world for substantial smartphone market growth is in the emerging markets. But Google’s Android platform seems to be dominating this area because of its more affordable price. Apple does offer a smaller, cheaper series of iPhones for about $400 each. But that’s still relatively expensive compared to some Android equivalents.

The recent slow down in Apple’s business could be just a temporary blip or it could be the start of a long term trend of falling profitability. The release of the iPhone 7 later this year will be an pivotal moment for the company and will help determine whether or not Apple is still an innovative company that has potential to grow.

This author is long 21 shares AAPL as of writing this post.

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