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Buffett, Apple and Didi Chuxing
1 billion dollars stakes on the menu
The meaning of two odd, and connected, investments
May 21st 2016 | NEW YORK | From the print edition
USUALLY it is a good sign when Berkshire Hathaway, the investment vehicle of Warren Buffett, takes a stake in a firm. Berkshire’s purchase of 1 billion dollars of Apple shares, disclosed on May 16th, may be an exception, however. Mr Buffett typically likes firms that are mature. This is a label that Apple is desperate to avoid—especially since it reported a 13% fall in its sales in the quarter that ended in March, compared with the previous year.
Mr Buffett is also famously, even proudly, ignorant about technology. Berkshire’s annual meeting was not webcast until this year and its other bet on the industry, a stake in struggling IBM, has cost it dearly. The new investment by Mr Buffett, who is 85, comes weeks after the veteran corporate raider Carl Icahn, who is 80, sold a 5 billion dollars stake in Apple. The sight of two octogenarians grappling over the firm’s fate does not enhance its aura as a temple of innovation.
The investment does highlight how much Mr Buffett’s firm has changed. A billion dollars is now a drop in the ocean: equivalent to just 0.3% of Berkshire’s market capitalisation. As Berkshire has got larger, it has shifted away from Mr Buffett’s long-standing strategy of buying and holding cheap shares towards buying and holding entire companies, such as BNSF, a rail group, and Kraft Heinz (which Berkshire co-owns with 3G, a buy-out fund). Investments in shares now comprise only a fifth of Berkshire’s assets; Apple will be among its smallest positions.
Perhaps Mr Buffett is just being opportunistic, as he has been before: he invested in Goldman Sachs, a large bank, in the depths of the financial crisis. Or perhaps he will steadily build a much bigger stake in Apple, which is now one of the cheapest big stocks in America, trading on a miserly 11 times earnings, compared with 29 for Alphabet and 72 for Facebook.
If Mr Buffett’s attraction to Apple sends an ambiguous signal about its growth prospects, so too does Apple’s decision to take a 1 billion dollars stake in Didi Chuxing, mainland China’s answer to the car-hailing app Uber, which was announced on May 12th. Tim Cook, Apple’s boss, said the deal would help his firm learn more both about China and about new services, such as entertainment systems for cars. But the transaction can also be interpreted in two other ways.
The first is that it allows Apple to curry favour with China’s government. The company generates 59 billion dollars of sales in the country, or a quarter of its total, so China is almost as important to it as America is. Yet its status with China’s rulers is precarious: last month Apple’s film and book online stores were banned there. Didi, meanwhile, is losing billions of dollars a year in a price war with Uber. China’s government is no doubt keen to see its home-grown offering survive. So by giving Didi a dollop of cash and its support, Apple will win brownie points in Beijing. It certainly won’t be the last American tech firm to seek them.
The second interpretation of Apple’s tactic is simply that, as the firm stops growing, it will become increasingly tempted by speculative bets on things that are only tangentially related to its core area of expertise. If you add up Apple’s spare cash and the money it is expected to make over the next two years, you get to about 300 billion dollars. Mr Cook has so far promised to return about 100 billion dollars of that in dividends and buy-backs, leaving him a vast pile of money to play with. Before he embarks upon any spending spree, Apple’s boss should remember that only one man in history has invested billions of dollars of other people’s money successfully over the long run: Warren Buffett. Perhaps Mr Cook should turn to his new shareholder for advice.
From the print edition: Business
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