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Apple Roundup: Goldman Deal, Buffett Adoration, Ireland, Green Energy

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Apple AAPL reported okayish results, but investors heaved a sigh of relief when iPhone demand turned out to be less disappointing than anticipated, especially given Taiwan Semiconductor’s TSM warning earlier on. And as in past earnings announcements, management continued to point to its services business that grew strong double digits and the installed base of iPhones (people who could be convinced to buy more services/entertainment from Apple in the future). There was also the big $100 billion share buyback announcement that captured headlines and won Warren Buffett’s heart.

Here’s some other Apple news from the past week or so-

Apple, Goldman Sachs Team Up

Apple and Goldman Sachs GS are getting together to bring more financing options to consumers. For Apple, it is essentially replacing Barclays with Goldman Sachs in the co-branded credit card that’s linked to Apple Pay. For Goldman, it’s a chance to enter a market dominated by Citigroup C and JP Morgan Chase JPM by partnering with a very well-known consumer brand.

Apple’s reasons for choosing Goldman are unclear given the company’s lack of experience in the area and since none of the companies are commenting on the media report. But it could have something to do with a lower payout as it strives to maintain profitability in a sluggish smartphone market.

For Goldman, the advantages are more obvious because the company needs to break out into consumer finance as other areas of the business aren’t doing too well right now.

The big question here is of course the changing consumer behavior because millennials and younger are loath to spend more as they have seen the effect of high debts on personal balance sheets as a result of extravagant and unnecessary spending necessitated by the great American dream. They are, on the other hand, keener on discounts, rewards, offers and so on. And that’s where the market is really competitive.

So it’s a start -- let’s see where the partnership goes.

Warren Buffett’s Berkshire Hathaway Can’t Have Enough Apple

The billionaire investor has revealed that in the last first quarter of 2018, he bought an additional 75 million shares of Apple for $12-13 billion, taking his total stake in the company to 240.3 million shares worth around $42.5 billion.

Apple also took advantage of softer pricing amid broader weakness to spend more than $23 billion on its own shares at an average price of $171.48.

At the Berkshire Hathaway BRK.B 2018 annual shareholder meeting, Buffet used creative analogies to support his decision. For example, "Nobody buys a farm based on whether they think it's going to rain next year…They buy it because they think it's a good investment over 10 or 20 years." So people shouldn’t be too concerned about the short term softness in iPhone sales. People should instead look at the "extremely sticky" products that attract customers and keep them coming back for more.

Buffett generally doesn’t have an appetite for technology stocks and his IBM holdings admittedly didn’t meet expectations, leading him to offload the shares earlier this year.

But the bet on Apple seems to be more because Apple is growing into more of a consumer products company (with some great technology behind it). It does all the things that Buffett likes: sells a sticky product, earns a huge profit ("If you look at Apple, I think it earns almost twice as much as the second most profitable company in the United States," he told CNBC), pays a dividend and buys back shares ("I love the idea of having our 5%, or whatever it is, maybe grow to 6 or 7% without our laying out a dime.")

This is also Berkshire’s first major investment/acquisition in two years.

Whatever be the reasons for the investment, there’s no doubt that it’s a big vote of confidence for Apple. No wonder the shares bounced back quickly.

Apple Rethinks Ireland Data Center

Apple has shelved plans to construct an 850 million euro (743 million pounds) data center in Western Ireland to take advantage of the green energy sources in the region. The data center would have employed up to 300 people. The reason for the decision change was cited as delays in the plan approval process. In this case, a couple of environmentalists objected to the structure by taking the matter to court.

When the High Court ruled in its favor, the decision was appealed at the Supreme Court. However, this was too much of a delay for Apple, which is seeing rapid growth in its EU business, so the company announced its withdrawal ahead of the Supreme Court’s ruling. The Irish government is now in the process of amending its planning laws to include data centers in the list of strategic infrastructure. This is expected to speed up the approval and legal process involved.   

Apple isn’t withdrawing from Ireland, however, and has plans of expanding its European headquarters in County Cork where it already employs over 6,000 people.

Apple Going Green on Aluminum

Apple is offering a group including Alcoa AA, Rio Tinto and the governments of Canada and Quebec $10 million plus technical support to set up a JV called Elysis. The governments will contribute $47 million each while the two companies will together contribute $43 million plus intellectual property. 3.5% of the JV will be owned by Quebec with the rest split evenly between Alcoa and Rio Tinto. Apple and the government of Canada aren’t taking ownership stakes for their investment.

Elysis is developing a new aluminum extraction process to be called elysis that won’t emit any greenhouse gases, or so the parties claim. The process will use a new unnamed advanced conducting material instead of carbon that will release oxygen instead of carbon dioxide.

The technology needed to retrofit existing smelters or build new, greener ones is expected to be ready for sale by 2024.

Apple uses a boatload of aluminum in all its products, so responsible sourcing can help it achieve its clean energy goals. And it doesn’t hurt to be ahead of the pack while it’s at it.

 

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Apple shares carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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