When it comes to stock picking I question what is going through Warren Buffett`s mind lately. First it was his stake in IBM, just a dreadful company, setting records for quarterly revenue declines, and bringing up the rear in the cloud space, and desperately trying to be cutting edge with IBM Watson. If IBM Watson is your business development deliverable for the last decade you know you are an antiquated old tired technology company on the decline. Yet Warren Buffett who routinely stated he didn't understand technology companies, and this reasoning was behind him avoiding the sector for decades from an investment standpoint, last year was pumping and promoting that IBM stock in any interview he could find. Warren when the only thing holding up the stock is your doubling down and their share buybacks with the fundamentals looking just terrible quarter after quarter what were you hoping to achieve with that technology investment? Did you even look at Amazon? How did Amazon`s fundamentals compare with IBM`s fundamentals at the time of the initial investment in IBM? He finally threw in the towel after continuously talking up IBM share buybacks quarter after miserable quarter and sold his entire IBM position.
So Warren Buffett`s next foray into the technology sector is Apple where he started an initial position last year and started adding to it to the tune of acquiring a 5% stake in the technology and hardware company. This sure looks a lot like his IBM stock purchase, just a little earlier in the inevitable fundamental decline cycle, but a large blue chip technology company that pays a dividend, and buys back a lot of stock through share repurchases, but hasn't created the next growth product since Steve Job`s departure from the company.
Remember how all the analysts were talking about the 10-year anniversary of the IPhone, with this release going to be a real game changer for Apple revenue growth? Well it frankly has been a disappointment at best, and certainly not a game changer for reviving Apple's stagnant revenue growth, and declining IPhone sales. Of course, this makes sense as the smartphone market which accounts for the majority of Apple's revenue is a mature market, and smartphones have been “gimmicked up” over the last 5 years to about peak gimmick that one can squeeze out of that marketing trick. Everyone that already has a capable smartphone at this point probably doesn't need another one, and the need to upgrade for one slightly new gimmick feature doesn't justify the $1,000 price tag that takes consumers three years to pay off. This money is better spent elsewhere for consumers discretionary income with inflation rising by the quarter.
But from a more meta-investment standpoint what is Warren Buffett thinking here? He avoided the stock like the plague for over a decade of the high margins and growth phase of the IPod launch and ITunes, and then the massive IPhone and Smartphone Supercycle decade, and every Tom, Dick and Harry and their cousin Ralph jumped in on this Apple Investment Stock in the most heavily owned issue on the street, and now he wants to come in and build a stake in the company? Furthermore, and is actually bragging on tv every chance he gets how this is such a great company, and he has made such an astute investment at this point in the investment cycle of not only Apple`s huge run over the last 20 years of which he sat on the sidelines for, but the end of the QE Central Bank liquidity era, top of the top in financial markets, i.e., bubble territory by historical standards, and likely the end of this 10 year business cycle, and looming recession probably spurred on by debt, inflation, and inventory cycle norms just around the corner. And now you build a 5% stake in Apple while all the smart money like David Tepper is running for the exits in this decade long crowded trade? Apple was downgraded again today with the analyst rightly sceptical that service growth is going to magically save the day from the end of the smartphone supercycle, just like the anniversary I-Phone talk was misguided by stock pumping junkies.
Apple is done as a growth company, they will be on the decline for the next decade plus as everything they produce becomes fully commoditized and generic. Shoot their best laptops have outdated specs by at least 8 months, and are overpriced by $1,000 bucks to the best comparable laptops with the same sleek, lightweight design features, with much better tech specs inside. Just research for yourself for a high end laptop configuration, Apple will stack up very poorly to the competition. Consumers might be fooled by branding over the short term, but with inflation rising each year, and everything Apple produces being fully commoditized, they will gravitate towards the best product with the best specs and a much cheaper price versus a stupid marketing logo that can be covered up with a protective case anyway. It appears Warren Buffett will be the bagholder of bagholders in this stock, as the most overcrowded trade in the history of Wall Street and Financial Markets unwinds over the next five to ten years.
I expect the next earning`s report to be quite insightful of where Apple is heading in the future, and more investors will realize that not only can Warren Buffett not stop declining fundamentals from occurring in a maturing smartphone market, but moreover, he is becoming a sign of when to exit a position in a company, especially when it comes to technology blue chip stocks. Everything that makes Apple look like an attractive investment happened in the past, and everyone piled into that investment thesis, now the commoditization phase takes hold, growth starts declining rapidly, investors run for the exits, and you get the classic “Value Trap” scenario that is all based on backward looking metrics and fundamentals. It's the future that matters from an investment standpoint, not what a company did 10 years ago!