Warren Buffett has a dead simple reason for why Apple will continue to thrive without Steve Jobs
- Some cynics have been calling for the slow death of Apple since its legendary founder, Steve Jobs, died in 2011.
- But, Warren Buffett recently endorsed the company and is heavily invested in its future.
- Apple's economic moat, or competitive advantage, could be what saves the company and allows its profits to continue to grow.
- Watch Apple's stock move in real time.
Since the death of legendary Apple CEO Steve Jobs, it's become somewhat fashionable to opine about the slow death of Apple. The company angered customers by removing the iPhone's headphone jack, alienated pro users by not including a standard set of ports on its newest laptops, and has struggled to offer a competitive experience with its Siri voice assistant.
But UBS analyst Steven Milunovich said that looking to another legend, Warren Buffett, can provide a bit of insight on the future for Apple.
"Warren Buffett differentiates between franchises and businesses. A franchise is based on offerings that are needed, thought by customers to have no close substitute, and not subject to price regulation," Milunovich wrote in a note to clients. "Franchises enjoy such strong economics that they can survive mismanagement. If that's true, then concerns about Apple losing its mojo post-Jobs could be accurate yet misplaced though we think management is performing well."
Buffett recently endorsed Apple by disclosing a 2.6% stake in the company, making his Berkshire Hathaway the fifth-largest owner of Apple shares. The move notably goes against his famous investing habit of staying away from tech.
The reason Buffett is so confident in Apple's ability to outperform its rivals comes down to his simple theory of economic moats. A company with a wide competitive advantage has a "moat" around its business that can keep other players at an arm's length and give the company room to maneuver.
It can be argued that despite several recent hardware missteps, Apple has maintained and expanded its economic moat. Apple customers tend to spend like high-value customers when they step into an Apple store, even when they wouldn't exhibit those behaviors at other retailers, Milunovich explains. Apple's customers are incredibly loyal and show their love by opening their wallets.
With its $1,000 iPhone X, Apple is certainly testing the limits of that theory, but even if the new phone hasn't sparked a "supercycle" like some analysts have predicted, demand has been strong since launch. And Apple is using its economic moat to jumpstart the next big revenue driver for the company, which may not come from a new or updated hardware product.
"Apple says that the vast majority of iPhone users do not purchase its services, but once they do that spending increases. The company's challenge shifts from attracting users to the ecosystem to emptying their wallets once there," Milunovich said.
If Apple can start nudging its existing customers to start spending money on services, like Apple Music, iCloud storage upgrades or Apple Care plans, the company can better monetize its loyal user base and pull even more money from them each month.
Because of its economic moat and loyal customers, Milunovich shares Buffett's bullish outlook on Apple. He rates the company a buy with a price target of $190, about 12.7% higher than the company's current price.
Apple is up 46.15% this year.
