Apple Inc. Making Moves Away from Tech?
Apple Inc. (NASDAQ:AAPL) CEO Tim Cook must have read my recent editorial when I talked about the company’s need to do something inspiring to make investors believe AAPL stock is worth a look again. It appears Apple is moving deeper into the emerging markets and investing in Didi Chuxing—the “Uber of China.”
Fighting to maintain the market share for its “iPhone,” Apple has struggled to convince iPhone buyers to purchase the other products in its ecosystem. In my recent commentary, I wrote, “the problem is Apple has yet to come up with another game-changing product or solution.”
Since my discussion, Apple has finally announced something different that’s not simply about the next “iPhone 7.” (The company has become much too dependent on its iPhones.)
But first, let’s review Apple’s latest investor news…
Buffett Buys Apple; So What?
First, in a surprising move, Warren Buffett’s hedge fund, Berkshire Hathaway Inc (NYSE:BRK.A, NYSE:BRK.B) added a $1.0-billion position in Apple in the first quarter.
In the past, this would have been enough to propel AAPL stock to the stratosphere, but I think Buffett has lost some of his influence on the stock market. For many market watchers, Buffett buying Apple was simply a value investment.
Now, contrary to what you may be thinking, this is not the first time Buffett has bought a technology stock, despite his general disinterest in them.
In 2011, Buffett’s fund added International Business Machines Corp. (NYSE:IBM) to its holdings. Back then, Buffett decided it was a better bet than buying Microsoft Corporation (NASDAQ:MSFT). Fast-forward nearly five years and I bet Buffett wishes he had invested in Microsoft. In that timeframe, the fund has lost billions in its IBM stake, while Microsoft has doubled.
Buffett’s buying of Apple stock should not be seen as a game-changer. It’s not. It’s simply adding what the fund obviously feels is a value stock trading at nine times its earnings and paying dividends.
The irony is that outspoken activist investor Carl Icahn just exited his investment in Apple, citing his concerns over the ability of the company to operate in the highly regulated Chinese market. I guess Icahn simply believed it was time to take his billions in investment profits and ignore the fact that he previously thought Apple was easily a $200.00 stock.
Emerging Markets Key for Apple?
But on thing that has intrigued me is Apple’s apparent effort to move deeper into the emerging markets to help jumpstart the company’s growth.
Tim Cook is currently in China and India—two emerging markets with about 30% of the world’s population. Winning in these markets could mean massive growth for Apple.
That won’t be easy though. (This seems to be Icahn’s thinking and it may be why he decided to bolt.) However, Cook clearly needs to defend the iPhone’s market share in China, which has been challenged by cheaper Chinese upstarts, such as Xiaomi and Huawei.
My thinking is that Apple will likely have to sacrifice some operating margins in order to compete on a relative basis with cheaper smartphones. If the company refuses to lower its margins, Chinese consumers aren’t likely to shell out more for an iPhone when there’s a cheaper but similar Chinese-made smartphone. The iPhone may be a better product, but not for the added cost.
Apple Investing in the “Uber of China”
What is most interesting, however—and what I mentioned earlier—was Apple’s decision to invest $1.0 billion in Didi Chuxing—the biggest car-sharing service in China and the Chinese equivalent of Uber. The investment represents roughly 2.5% of the current valuation of Didi.
Speculation is that Didi is looking for an initial public offering (IPO) in the United States before 2018. (Source: “Chinese ride-hailing giant Didi plans U.S. IPO in 2018,” Reuters, May 16, 2016.)
While the Didi investment is not a game-changer in itself, it does show Apple’s willingness to think outside of the box and diversify away from its iPhone—and that’s the headline news here.
Alphabet Inc (NASDAQ:GOOGL) has been diversifying for years and it has turned the company into one of the top Internet stocks out there. Perhaps Apple wants to follow a similar route, given it has hundreds of billions of dollars in free cash to spend.
Plus, with Icahn gone, the pressure from him for AAPL to buy back shares and pay dividends may fade. Apple could now look at spending its cash on innovative ventures that could add growth to the company and shift its dependence away from just the iPhone.