It’s a good ‘ole fashioned showdown on Wall Street as two investment giants tackle Apple Inc. (AAPL).
On one side of the trade, we have notorious activist investor Carl Icahn. Due to apprehension about Chinese consumer strength, Icahn headed for the quickest exit he could find, pocketing a cool $2 billion profit.
But hoisting the bullish argument is Warren Buffett’s Berkshire Hathaway Inc. (BRK.B, BRK.A), which recently disclosed a $1.1 billion position in Apple stock. With the line drawn in the sand, who will win out in the AAPL chess match?
Both sides certainly have compelling evidence.
Icahn vs. Buffett
The benchmark exchange-traded fund Technology Select Sector SPDR (XLK) — where Apple stock is its top holding — has been a hit-or-miss affair. That’s why Buffett himself elected his trusted stock picker to make the go-ahead decision.
In addition, iPhone production woes point to weak demand for the AAPL pipeline’s flagship product.
But then again, we are talking about Apple — the world’s most valuable brand. It has enough money to be a viable, emerging-market nation. It didn’t get there solely on the back of good fortune. And Apple stock has seen far worse in terms of technical performance, yet it has always found a way to higher ground. Icahn, despite his exit, admitted as much, stating that AAPL is a well-run organization.
Since the iPhone’s introduction, there is a 91% statistical correlation between its sales growth and the quarterly performance of Apple stock. That’s not surprising when the iPhone accounts for more than two-thirds of total revenue, furthering validating Icahn’s selloff.
At the same time, Wall Street analysts aren’t as eager as Icahn to abandon ship. In fact, several investment firms side with Buffett, maintaining a positive outlook on Apple stock.
For one thing, the potential lack of new features in the upcoming iPhone 7 may not be a sales deterrent as many consumers are at least one generation behind in the product lifecycle. To them, the “7” represents a big step up.
The other factor to consider is that top-line sales alone won’t wholly determine the future of Apple stock. There’s something to be said about keeping the competition at bay.
While AAPL is getting bruised by Samsung Electronic (SSNLF) in terms of smartphone market share, the former owns its entire product ecosystem. Samsung, in contrast, lags in interconnectivity among its devices. Furthermore, sales of both new and used iPhones will only increase opportunities for service- and accessory-oriented revenue.
For example, from 2009 through 2012, unit sales growth of iPhones averaged 81%, whereas Apple stock returns — measured from Q1 to Q4 — averaged only 45%. From 2013 until last year, iPhone growth averaged 23%, but Apple stock returns did slightly better at 24%.
While nearer-term momentum for AAPL is impacted by the company’s smartphone business, in the long run, Apple stock is more independent from iPhone sales. That’s great news for Buffett and his Berkshire portfolio, which aims for profit sustainability.
It also dispels the myth that Apple stock can’t survive without its flagship model constantly breaking new ground.
Bottom Line for AAPL Stock
In the end, neither Buffett nor Icahn will likely regret their decision towards Apple stock. Icahn played strictly by the investor’s playbook by making money — and lots of it. He was right to dump his position when he did, knowing that AAPL faces immediate challenges.
Buffett, though, is the one that truly “gets” Apple stock. Even though he personally doesn’t like tech’s inherent volatility, he trusted his advisors to make a long-term bet on a company backed by solid fundamentals.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.