Warren Buffett’s Berkshire Hathaway invested more than $1bn in Apple (NASDAQ: AAPL) by 31 March, according to a regulatory filing disclosing the firm’s share holdings.
Who would have thought it? After all these years of Apple’s meteoric growth and share price appreciation, the Sage of Omaha chooses right now to venture beyond the boundaries of his self-declared ‘circle of competence’ and dive deep into the mysterious world of technology.
Classic Buffett
To be fair, this isn’t the first time Mr Buffett has shopped in the technology sector. In 2011, he started buying shares in International Business Machines (IBM). It’s also reported that the decision to press the buy button on Apple looks likely to have been driven by one of Buffett’s two stock-picking deputies, Todd Combs and Ted Weschler.
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Nevertheless, this purchase of Apple shares has classic ‘Buffett’ written all over it. Apple seems a little out of favour with investors who seem to believe that it may deserve a lower valuation due to stalling growth. When others are fearful Buffett likes to get busy buying, and why not? Apple has strong cash flow, an enduring brand, a big pile of cash on its balance sheet and an apparently low valuation. A purchase of Apple shares now looks like he bought quality at a reasonable price and that strategy has served him well for decades.
London’s Apple
Buffett’s move on Apple wakes me up to the potential of London-listed ARM Holdings (LSE: ARM), which is also languishing. ARM’s chip designs go into Apple’s products such as the iPhone as well as into products by most other device manufacturers. The slowdown in Apple’s growth seems to have influenced investor confidence in ARM, but I think there’s plenty of growth potential left in its business.
With the recent Q1 results, ARM delivered a revenue rise of 14% year-on-year and earnings per share ballooned by 15% — no sign of a slowdown there. Yet at today’s 937p share price, ARM trades on a forward price-to-earnings ratio of just over 23 for 2017. That’s a lower valuation than we’ve seen for some time, but City analysts following the firm seem confident that growth will continue, predicting earnings uplifts of 43% for 2016 and 15% for 2017.
Growth opportunities
But there’s much more to ARM than what it does for Apple. Modern trends continue to fuel ARM’s growth opportunities, such as the way devices are evolving from being digital, through smart, to being inter-connected. The firm is ramping up its investment in research and development and aims to accelerate market share gains in areas such as networking infrastructure, servers, and the growing Internet of Things (IoT).
To me, ARM looks like a potential Buffett-style investment right now. It’s hard to deny the firm’s quality, and the valuation looks reasonable given its prospects. The firm’s intellectual property occupies a well-defended place at the heart of many popular consumer goods manufactured by others and, like Apple, ARM is cash-rich, generates oodles more cash and is well-run.
