I love Apple, as an investor and as a user. I was trumpeting the virtues of Apple here years ago, long before T/T or Buffett invested.
Yet I am somewhat dumbfounded–and as a large Berkshire shareholder, disappointed–that Buffett is buying more shares of Apple at roughly-current valuations, rather than Microsoft.
Based on current-year earnings, which I count as trailing two quarters plus the estimate of the next two–Microsoft is slightly cheaper than Apple. True, one can debate the “quality” of the earnings, and maybe Apple is a slight leader here. Indeed, their free cash flow perennially outpaces their reported earnings.
But one also must consider the moat. The extremely long term moat. And it is here where I feel–great though Apple’s moat is–that Microsoft has the lead.
And what about growth? Again, given the greater diversity of Microsoft’s offerings and the lack of penetration of areas such as Azure/cloud, Microsoft seems like the clear winner here. Witness Microsoft’s 12% revenue growth vs Apple’s 2%.
One other thing is that even if everything else were equal, the fact that Apple depends on the good graces of China for basically it’s very existence would seem to require a substantially higher discount on future cash flows than for Microsoft. (I know, I know, Apple is not dependent on China for it’s actual existence, but it’s almost inconceivable that the business could continue in anything vaguely like it’s current form should, say, China nationalize or ex-communicate it…maybe as a lever point if/when it invades Taiwan).
If this has anything to do with the fact that Bill Gates used to run Microsoft and used to be on Berkshire’s board, that would seem an asinine rational for why Berkshire can’t buy shares in 2022.
I’m hoping that MSFT shows up on Berkshire’s earnings report. We’ll see.
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"Yet I am somewhat dumbfounded–and as a large Berkshire shareholder, disappointed–that Buffett is buying more shares of Apple at roughly-current valuations, rather than Microsoft.
Why are you dumbfounded?
Buffett:" “I don’t think of Apple as a stock. I think of it as our third business,” Buffett said.
“It’s probably the best business I know in the world. And that is a bigger commitment that we have in any business except insurance and the railroad,”
https://www.cnbc.com/2020/02/24/warren-buffett-says-apple-is…
Why are you dumbfounded?
Other than the reasons I listed?
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Buffett:
“It’s probably the best business I know in the world. And that is a bigger commitment that we have in any business except insurance and the railroad,”
Again, this does not address my post at all.
I did not question buying AAPL a few years ago at a 10X P/E.
I questioned adding to Berkshire’s already enormous stake in it at roughly current valuation over Microsoft.
Microsoft has a lower P/E plus higher growth rates. So it seems the only way AAPL (at current valuations) makes sense over MSFT is if the duration of the moat seems clearly higher. To me, it does not. What I am looking for is arguments/rationale for why I am wrong…not two-year old clips of Buffett on CNBC.
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"Other than the reasons I listed?..
But one also must consider the moat. The extremely long term moat. And it is here where I feel–great though Apple’s moat is–that Microsoft has the lead."
Maybe Buffett would disagree with you on that. Probably Charlie as well.
Apple has the walled garden and massive and growing user base.
What does MSFT have that is comparable?
Serious question. I’m trying to learn.
Apple has the walled garden and massive and growing user base.
What does MSFT have that is comparable?
Serious question. I’m trying to learn.
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Office. Despite years of Google’s efforts to displace it, Office commands roughly 90% of that market, and Google about 10% (with Apple having a fairly irrelevant share). And now that it’s mostly on a subscription basis, that makes for a very, very steady income source. Can you seriously believe that if Google couldn’t topple this empire, anyone else can?
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Windows. The vast majority of enterprise software rides on top of this. Despite laudable efforts from Linux…and Apple. Again, if Apple and Linux haven’t toppled this empire, who could? And all the benefits of shifting to subscription apply here too.
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Linkedin. Basically a monopoly in enterprise social media. Growing like a weed, and inconceivable that anyone can challenge it. Forever, basically.
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Teams. It’s all-in-one package and integration with all the other Microsoft offerings make this a very formidable product with an enormous addressable market. And it’s very fertile ground for important metaverse applications. The very rapid growth speaks to the competitiveness of this (check out market share for, say, Zoom or Slack in comparison).
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Gaming. Gaming is slowly eating the world (of entertainment). This will accelerate dramatically when very polished metaverse applications eventually arrive. Microsoft is very well situated to dominate.
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All the other formidable enterprise software and applications that Microsoft offers, not least of which are their AI and security offerings.
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Last, but not least, Azure. It’s absolutely dominant. While the cloud (ex-China) will basically remain a triopoly, Azure seems to be outcompeting AWS and Google Cloud…just look at recent growth rates. This is an industry where scale absolutely matters, and Azure/AWS have it. I believe Azure has much more of an enterprise ecosystem to go with its cloud platform, and its superior growth rates would seem to suggest enterprise leaders agree (though, to be fair to AWS, part of this is almost surely due to the anchor of size on growth rates).
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Apple has the walled garden and massive and growing user base.
What does MSFT have that is comparable?
Serious question. I’m trying to learn.
I love Apple products and don’t mind paying a premium to have them, but I could easily live without them. Android works pretty well.
I hate Microsoft products, and would pay a premium to avoid them, but I just can’t - my work computer environment is 100% Microsoft : the OS, the word processor, spreadsheet, powerpoint, Teams, Outlook, etc.
So which one has a stronger moat?
I would say MS. Plus faster growth. Minus the dependence on China.
I expect Buffett will keep buying Apple and probably won’t buy Microsoft, but I don’t understand why.
Regards, DTB
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I hate Microsoft products, and would pay a premium to avoid them, but I just can’t - my work computer environment is 100% Microsoft : the OS, the word processor, spreadsheet, powerpoint, Teams, Outlook, etc.
Bingo!
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Commoncents33, I appreciate your points and arguments. I have owned a growing piece of Apple since 2006 and agree with Buffett and it’s consumer dominance. I (and my family) would be quite frustrated living my life without the iPhones, iPads, AirPods, Apple Watch, MacBook Pro, and many of its services. We use their products for hours daily and love the products, moat, innovation, management, ecosystem, network effects, capital allocation and treatment of owners including the enormous buybacks. Berkshire’s >$150B and Buffett’s praise have only strengthened my views and enthusiasm.
I appreciate Microsoft and your thoughtful breakdown of its key components and its moat and reasonable valuation. However, I do not live in the Microsoft world on a day to day basis, and I am not nearly as wowed and addicted to their products and cannot see their future return of cash as clearly. I did start a small MSFT position in Fall 2020. However, I would be quite pleased if BRK ultimately owns a position in MSFT as well as GOOGL.
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I appreciate Microsoft and your thoughtful breakdown of its key components and its moat and reasonable valuation. However, I do not live in the Microsoft world on a day to day basis, and I am not nearly as wowed and addicted to their products and cannot see their future return of cash as clearly. I did start a small MSFT position in Fall 2020. However, I would be quite pleased if BRK ultimately owns a position in MSFT as well as GOOGL.
While they do compete somewhat in the consumer space, MSFT almost does that as a historical necessity - a portion of Windows, Office and all of gaming are more or less targeted at consumers - and it’s holding its own. Additionally there are entire areas of MSFT’s business that don’t really compete with AAPL and are being continually developed at fast rates. And so it arguably has as durable moat (or more so) than AAPL.
So given they are both excellent businesses with durable moats, why wouldn’t one wish to own both? If only for diversification’s sake?
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Microsoft has some formidable businesses, adding up to one very formidable company.
They are less visible to many observers than Apple is because their focus has always been on the business clients.
But I’m not particularly keen on the idea of buying the stock.
Wake me up next time it’s attractively priced. 1/3 to 1/2 cheaper?
I think part of the consensus of how wonderful the business is has been coloured by the extremely good stock price performance lately.
The stock price has grown a whole lot more than the business has.
The price rise, and the company’s size, have conspired to made it very visible as a success story.
This visibility has perhaps exaggerated the view of how exceptional the business is.
Sure it’s wonderful, but there are in fact lots of great businesses out there.
History can rhyme.
Consider: multiples were extremely high lately and have just come down to very high.
Earnings keep on chugging higher.
That’s a very similar situation to the one seen in early 2003 just after the stock split: similar trajectory, the same multiple of current smooth earnings.
What happened next?
Earnings kept on chugging higher. Multiples fell back to earth. Stock market returns were really lousy for a long time.
From an average purchase day in 2003 and holding five years, total return inflation + 0.3%.
For the next five years, inflation + 5.4%/year.
All while earnings kept on chugging higher. It took a decade for the rich starting valuation to wear off, give or take.
Possible moral:
For a safe return, pick a really good business with longevity.
But for a good return, buy it at a price which also offers a margin of safety.
Jim
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Commoncents33,
Thank you for taking your time to outline your thesis on MSFT.
I learned something.
BHH
"Possible moral:
For a safe return, pick a really good business with longevity.
But for a good return, buy it at a price which also offers a margin of safety."
Jim,
What are your thoughts on Apple following the earnings release?
Great company but still overvalued like MSFT?
What are your thoughts on Apple following the earnings release?
Great company but still overvalued like MSFT?
I wouldn’t say overvalued as such. That’s a notion with a lot of possible meanings.
I don’t find it attractively valued. The valuation level isn’t cheaper than what I expect as its future average.
Latest trade in pre-market is about $161.
Having looked at the earnings release and consulted certain entrails and auguries,
I reckon that’s maybe 20-22% above the valuation level that I’m currently willing to use when counting my chickens.
It’s such a big position for Berkshire that I track its value using smoothed earnings rather than market value, same as I do for BHE or BNSF.
Jim
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Sure it’s wonderful, but there are in fact lots of great businesses out there.
Do you equate “wonderful” with “great”?
I do not feel there are “lots” of “wonderful” businesses out there. The sort Buffett used to term “Inevitables”.
To be considered wonderful for myself, I’m looking for:
- Both a very high Competitive Advantage Gap, and more importantly (and difficult), a very high Competitive Advantage Period.
- Sustained high return on invested capital and on net tangible assets.
- Little to no debt, preferably.
- Also preferably, has not come close to saturating its market(s).
If you’re willing to share, I’d love to here a few that you feel are “wonderful” that have a valuation level significantly lower than MSFT. To make it even more relevant to my initial post, what are some that have the massive market capitalization required for Berkshire to make a meaningful investment?
History can rhyme…
Earnings kept on chugging higher. Multiples fell back to earth. Stock market returns were really lousy for a long time.
Maybe. But the Microsoft of today is enormously different than the Microsoft of 2003. Looking at the current business (1/5 of a century later), I think it is more likely that it may “rhyme” with the likes of Costco, or maybe Fastenal; those are two that happen to spring to mind that have sustained very high multiples for a very long time, not with explosive growth, but just “chugging higher”.
In any case, my opening post was comparing Microsoft specifically to Apple. Apple’s very elevated P/E seems to me less justified than Microsoft. Maybe I’m wrong, but that was the point I was making.
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Microsoft has some formidable businesses, adding up to one very formidable company…
But I’m not particularly keen on the idea of buying the stock.
Wake me up next time it’s attractively priced. 1/3 to 1/2 cheaper?
Regarding Apple: I reckon that’s maybe 20-22% above the valuation level that I’m currently willing to use when counting my chickens.
This is where we disagree: you seem to feel Apple merits a significantly higher valuation than Microsoft, whereas I feel the opposite. I’d love to here your rationale for that (other than stock price action for Microsoft from a couple decades ago).
Again, I love Apple. I sung its praises on this board years before Buffett saw the light, yet I received either disagreement or yawns.
My issue with its very high P/E is that I don’t see such a clear path to long-term growth to justify that. Although they’ve diversified quite a bit, iPhone is still the engine that pulls the train, and that’s a fairly (though not fully) saturated market. I believe that’s mostly true with “services”…at least the ones that will be highly profitable (iCloud, App Store, the TAC from Google as preferred search provider). True, if they manage to release augmented reality glasses that have a case as comparable as the iPhone was, that would change everything; but there are huge technological difficulties there, so I wouldn’t want to bet too heavily on that. In any case, that potential is probably counterbalanced by the substantial risks that regulations will impair other areas, such as the App Store.
On other important area in which I feel Microsoft is superior is in capital allocation. Microsoft is able to find very high ROIC areas in which to deploy a significant portion of its free cash flow, whereas Apple mostly plows its free cash flow into share repurchases–regardless of price; at current valuations, that’s a low return on investment.
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My issue with its very high P/E is that I don’t see such a clear path to long-term growth to justify that.
So far Apple has not been subject to serious anti-competition, anti-trust legislation or lawsuits. But, that could change, it has to change, especially given how they use their OS as monopoly. If Apple using its OS monopoly to force people to buy expensive hardware (Phone) or other services, for example using its play store as a toll gate, or restricting data access to other vendors in the name of security, yet Apple itself exploits the same data to drive higher ad revenue, etc.
In many ways I think this is peak apple. But I could be wrong, they may come with some meaningful innovation and drive higher.
So far Apple has not been subject to serious anti-competition, anti-trust legislation or lawsuits. But, that could change, it has to change, especially given how they use their OS as monopoly. If Apple using its OS monopoly to force people to buy expensive hardware (Phone) or other services, for example using its play store as a toll gate, or restricting data access to other vendors in the name of security, yet Apple itself exploits the same data to drive higher ad revenue, etc.
I’m not as much worried about that in the U.S., though it could certainly happen. I’m more worried about the European Union, which seems to deal with the fact that they can’t produce the kind of killer tech businesses the U.S. can by penalizing our leaders. Hopefully this just remains a kind of “tax”, rather than truly interrupting the business models. But there seems to be little to keep them from getting greedy in this area.
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US tech companies seems to be not much worried about anti-trust. For now, congress is in their pocket, ignoring the rhetoric for the peanut gallery, no legislation is in sight. However, these tech companies are too big and too powerful. Apple is so powerful, it can even take down someone like Meta. The anti-trust legislation is absolutely required. Will it happen, will it happen in the near-term is a question.
Unfortunately Democrats, who are supposed to be championing such things are too cozy with these companies.
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