No one in the investment world is so closely watched Warren Buffett. The Oracle of Omaha’s fantastic track record in capital allocation Berkshire Hathaway has made him an investing legend whose portfolio holdings are considered potential buying opportunities for individuals.
One of Buffett’s biggest wins in recent times Apple (NASDAQ: AAPL). Berkshire first invested in the “Beautiful sevenshares in the first quarter of 2016. And from the beginning of that year to May 21 of this year, the shares are up 631%. Apple now represents a whopping 40% of Berkshire’s entire portfolio.
Read on to find out what factors likely caught Buffett’s attention about this company. Investors can then assess whether the stock is a smart buy today.
Passing Buffett’s test
Looking back, it’s not that hard to figure out why Buffett was attracted to Apple. Although he is someone who typically stays away from technology-oriented companies, his thinking focused on the fact that Apple was primarily a powerful consumer brand. This was the key to its success.
That brand has helped Apple increase its pricing power, a characteristic that Buffett believes makes a company great. Consumers always seem to be willing to pay for the company’s expensive hardware products, even if the latest updates aren’t all that revolutionary. Overall, the company performed excellently gross profit margin from 40% in fiscal 2015, the year before Buffett bought shares.
Customer loyalty is another quality that cannot be ignored. In Apple’s case, the combination of well-designed products with easy-to-use software and services creates an ecosystem that essentially results in consumer lock-in.
Buffett is known for exercising patience as he waits for the so-called big note. During the first quarter of 2016, Apple shares traded at average price-earnings ratio (P/E) ratio of 10.6, which in retrospect seems like an absolute feat. I think the market may have been concerned that iPhone growth was stagnant at the time, leading to a pressured valuation multiple.
But like the independent thinker he is, Buffett realized that Apple was still an incredibly profitable company. It posted a 30% operating margin in fiscal 2015 and generated $70 billion in free cash flow that year.
In fact, Apple was in impeccable financial shape. As of December 26, 2015, the company had $216 billion in cash, cash equivalents and marketable securities on its books, compared to $56 billion in long-term debt.
Thanks to its many wonderful features, Apple was a no-brainer investment decision for Warren Buffett.
Is it too late to buy Apple stock?
If we look at Apple from a new perspective today, I think investors will come to a different conclusion. After years of strong stock performance, this company has a market cap of $2.9 trillion. And the stock is definitely not cheap.
Apple currently trades at a price-to-earnings ratio of 29.7. This is much more expensive than the ten-year average. While Berkshire is still a significant shareholder, I doubt Buffett would buy the stock at its current valuation.
Given its enormous size, it’s easy to argue that Apple has limited growth prospects, at least not close to what it has achieved in the past. The company has reported year-over-year revenue declines in five of the past six fiscal quarters. Consensus analysts estimate that sales will rise just 4.6% annually through fiscal 2026.
The iPhone was launched about 17 years ago, but it’s still important, accounting for half of sales in the last fiscal quarter (Q1 2024, which ended March 30). Since it is at a very mature stage of its life cycle, it is difficult to encourage consumers to continue upgrading to the latest devices. Unless Apple can introduce a breakthrough new product that can move the financial needle, it’s best to temper expectations.
Apple has proven to be a big winner for Berkshire. But investors should think twice before buying shares today.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
40% of Warren Buffett’s $379 Billion Portfolio Is Invested in Just One Stock Originally published by The Motley Fool
