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Warren Buffett's Huge Stake in Apple: What He May See In AAPL

Warren Buffett and Berkshire Hathaway (BRK-A, BRK-B) have long been adverse to investing in technology companies. That mantra started to change in 2011, when Berkshire started investing in IBM (IBM).

Since then, his investment manager lieutenants, Todd Combs and Ted Weschler, have added to Berkshire's investment portfolio, buying up stakes in technology companies, but never to the size and scope of the IBM investment, which was $11 billion at the time.

Now, it looks as if Buffett is doing it again -- this time with Apple (AAPL).

In a recently released SEC filing, Buffett's Berkshire Hathaway revealed it now owns a sizable stake in the Cupertino, Calif.-based tech giant. At the end of the fourth-quarter, it owned 57.4 million shares, up from 15.2 million shares in a previous filing. At current prices, the stake is worth just over $7 billion, likely making the stake with Buffett's approval, if not done himself.

Without putting words into his mouth, the Apple stake is likely similar to IBM in Buffett's eyes, as the venerable iPhone maker is becoming a services company, one with steady revenue coming from dependable subscriptions.

Buffett's investment isn't about what technology is the "next big thing," whether augmented reality is as big as Apple thinks it will be or whether Apple is really making a car or not. It's pure and simple economics and the attractiveness of the subscription model.

In Apple's fiscal first-quarter, it generated $7.1 billion in Service revenue, from things like Apple Music, iTunes, the App Store, Apple Pay and more. It's the healthiest portion of Apple's business, one that's growing at 18% year-over-year. CEO Tim Cook has said that Apple's Service business will be the size of a Fortune 500 company sometime this year, indicating that growth isn't slowing down anytime soon.

Yes, Apple is still beholden to sales of the iPhone, iPad and the Mac for the majority of its revenue, but the Service business is slowly, but surely, making Apple's revenue smoother and less lumpier from a quarterly perceptive. Visible, growing revenue is worth significantly more than revenue from hardware that acts like a roller coaster, with ups and downs.

All investors need to do is look at the earnings multiples for companies like Salesforce.com (CRM), Microsoft (MSFT) and others to see the positive impact. Companies that have enormous subscription-based revenue, which put off tremendous amounts of operating cash flow in a predictable manner are ultimately more valuable than ones that do not.

The company has a goal of doubling its Service revenue by 2020, which is an admittedly large task. But with a user base of over 1 billion active devices, Apple should be able to continue to grow parts of its Service business, like Apple Music and the App Store, as it continues to add new features (namely, TV shows for Apple Music).

It's likely we will hear more about Buffett's Apple stake in the days and weeks to come. If we do get commentary from the Oracle of Omaha himself, expect Services and predictable revenue to be a big part of the line of thinking.

I know it would be for me.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.