Tuesday, November 3, 2009

Apple, Google and Buffett

What is similar between Apple, Google and Buffett?

Nothing at the first glance, dig a bit deeper and one comes across multibagger personalities. All of them are in different businesses rarely encountering others as competitors but I can’t help myself imagining the ever upwards sales and profit charts for these companies (Berkshire Hathaway in case of Buffett). All three of them share some common traits.

Core business

Apple and Google excelled in their initial businesses of computer hardware and internet search. None of them were the first entrants (a number of mainframe makers were present when Apple started) but harnessed the potential of being ‘not so late’ entrants.

Buffett, on his part can easily find a place in the list of all time great investors on the basis of his early investment in Coke and Gillette. It was the firm belief in the value investing ideals that he refused to invest in any of the dot coms. Needless to say, Buffett had the last laugh.

Diversification

Apple has always been great with software but has never played the ‘software alone’ card till now. Rather, the company has always focused on the combination of hardware and software. Not paying heed to the naysayers for entering into the portable music player industry, Apple took on the challenge and created a profitable niche for iPod in the industry dominated by the likes of Sony and Philips.

Google saw a logical stagnation in its income merely being a search engine and providing contextual text advertisement along with search results. The company thus widened the scope of its contextual advertising by diversifying into email and acquiring YouTube.

The Oracle of Omaha officially says that he prefers to invest in the businesses he understands. But he has repeatedly made investments which defies the logic. Latest in the list is the investment in Chinese battery maker, BYD. The investment is something which even Charlie Munger claims Buffett wouldn’t have done five years ago. Buffett learns. Now Buffett and Berkshire Hathaway have the clout to earn US$1bn profit on such investment in less than a year

Reinvent

It is interesting to note how Apple reinvented itself after losing its first mover advantage in GUI based operating system to Microsoft. First notebooks and then mp3 players, the company created new markets. Latest feather in the cap for the company is the surging sales of its smart phone, iPhone. Again, Apple took on the industry leaders including Nokia, Sony and BlackBerry. A dip into the latest regulatory filing of Apple will tell us that the company books more sales by selling phones and music players overtaking the traditional Mac business.

Google has now become an internet powerhouse offering web search, video hosting, web browser and maps. Bill Gates is surely threatened by the idea of a Google developed operating system. However, apart from the internet, Google has many other offerings. The company is at the forefront of changing the electricity consumption pattern. Google recently showcased a power monitoring system which puts more options in the hands of users by providing consumption details every 15 minutes.
Google’s variety of the products stems from the fact that the company officially earmarks some hours every week in which employees are encouraged to pursue projects of their interest.

Markets have revisited the theory of value investing after every stock market collapse to find a self assured Buffett. It doesn’t happen so often that the chief of an investment firm of the size of Berkshire Hathaway keeps US$30bn in cash earning nothing on it but finally walks all the way to bank with investments in firms such as Goldman Sachs, Harley Davidson and Wells Fargo at favorable terms. In the hindsight, it appears that Buffett seldom deviates from the value investing principles while the rest of market goes too far ultimately resulting in a crash landing.