The Oracle of Omaha, Warren Buffett, is not used to technology stocks. But he is big on Apple, making the mobile device giant his second largest stock holding. He likes Apple for the same reason he likes Coca Cola: both deliver services which customers are psychologically attached to. For Mr. Buffett, the deal is not just in the sophistication of the camera system, the AI or voice recognition capabilities. He values Apple as a consumer brand which has changed the lives of many, and then supporting those lives. That brand elemental construct has become the moat that made Apple customers to remain fans. Mr. Buffett is banking on that.
“Apple has an extraordinary consumer franchise,” he told CNBC. “I see how strong that ecosystem is, to an extraordinary degree. … You are very, very, very locked in, at least psychologically and mentally, to the product you are using. [The iPhone] is a very sticky product.”
That attachment isn’t showing signs of loosening: A survey from Morgan Stanley published in May pegged the iPhone’s retention rate at 92%, compared to 77% for Samsung phones, and up from 86% the previous year.
Simply, more and more people are migrating to iPhone. It has a very good net positive in keeping its customers.
Winning the Markets
The position of Apple today did not come by wishful thinking. Apple innovated and became a category-king firm. What happened about ten years ago in the smartphone sector is happening in the fast emerging autonomous vehicle sector. In California at the moment, there are about 50 companies which are testing driverless cars. Not all these companies would thrive. What would happen would mirror what happened in the early days of car manufacturing where despite many players, only Ford and Chrysler emerged victorious. Others strategically banded together to become General Motors.
California has given 50 companies a license to test self-driving vehicles in the state. The new rules also require companies to be able to operate the vehicle remotely — a bit like a flying military drone — and communicate with law enforcement and other drivers when something goes wrong.
So, in coming years, we would see these firms competing as they explore market opportunities. It may turn out to be about 3-5 companies that would survive. Others would go. Cash would be extremely critical in this competition. Japan’s Masayoshi Son’s SoftBank has invested $37 billion dollars in about 40 companies in 2017 indicating the scale required to build that separation. Yes, besides the technical vision, winning markets would require unlocking capital to win.
Warren Buffett understands that iPhone’s present position builds a moat for itself. No company can just come and dislodge it as it has a top-grade proprietary hardware powered by exclusive software. The competitive advantage is massive both from the technology angle and the brand equity. Apple out-competed once-leaders like Nokia and Blackberry to become the king and got itself into the lives of customers. Buffett uses that mindset to access his investing strategy.
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
It is expected that despite the apparent small decline in iPhone sales on iPhone X, the next upgrade would experience huge numbers. Analysts believe that many iPhone users would be ready to upgrade in new updates.
Fresh off a year-over-year decline in iPhone shipments last quarter, hundreds of millions of iPhone owners could update to new models in the next 18 months, according to GBH Insights analyst Daniel Ives. In a note to investors, Ives predicts that approximately 350 million iPhones “are in the window of opportunity to upgrade.” And Ives believes customers are simply deciding now which iPhone they want to buy.
But Ives went one step further. He said that the predicted iPhone success, coupled with the continued growth in Apple’s Services business, which includes App Store and Apple Music, should help to propel the company’s share price to “the $200 range” in the next three to six months. He also believes Apple will hit $1 trillion in market cap in relatively short order.
Avoiding the Flashes
From the investment thesis of Mr. Buffett, we could see one thing: buy stocks of tech companies where the users are psychologically attached to their products. Apparently, he did not follow that model for IBM where he got in and largely getting out. IBM remains a great company but does not hold any special moat in any of its categories. While Watson has won games, it is possible that such models may not be relevant in the age of Apple Siri and Amazon Alexa where AI systems can be trained with data to take up more challenges. Certainly, Buffett would not be investing in Fitbit which continues to struggles despite early flashes.
Smartwatches (source: Wearable)
Fitbit’s share price plumbed a new all-time low on Tuesday, after the one-time king of wearable devices announced another disappointing quarter of sliding sales.
The company’s stock, which debuted in 2015 at $20 a share, hit an all-time low of $4.67 in morning trading. It closed at $4.86, down 12% on the day.
The fact is this: Fitbit despite ist leg-up has been unable to build a psychological attachment with its customers. What happened to Pebble, the smartwatch industry pioneer, may happen to Fitbit. Apple smartwatch business is the very reason why Fitbit is struggling. TomTom is leaving the category.
Our phones are our parleys in many ways. A great phone can simplify lives. The phone is not just a device for communication; it is a lifestyle system. Across cities around the world, phones are powering services which are changing how communities function. One area is ride-hailing where its popularity seems to be pulling users out of using mass transit: “One promise of ride-hailing companies like Uber and Lyft was fewer cars clogging city streets. But studies suggest the opposite: that ride-hailing companies are pulling riders off buses, subways, bicycles and their own feet and putting them in cars instead. And in what could be a new wrinkle, a service by Uber called Express Pool now is seen as directly competing with mass transit.”
Simply, Uber is realigning market structures in transportation. When launching app is far easier than holding car keys, you would know that the service is great. And when you go deeper, one key product is making that possible: the iPhone [there is Android but more iPhone users use Uber]. That is why Warren Buffett is investing in Apple. With iPhone and the services it enables and powers, directly and indirectly, around the world, Apple would remain great because the customers are fans, psychologically attached to it.