Berkshire Hathaway CEO Warren Buffett has famously shied away from technology stocks for much of his career. He has given several explanations (and expressed a modicum of regret) for passing on opportunities like Microsoft and Alphabet, but they all amount to the same thing. Technology companies are generally outside his realm of expertise.
However, Buffett began to redefine his circle of competence about a decade ago when Berkshire took a substantial stake in IBM in 2011. Berkshire has since exited that position, but it laid the foundation for another one: Apple (NASDAQ: AAPL). As of Sept. 30, Berkshire Hathaway had 49% of its $318 billion equity securities portfolio invested in this single technology stock.
The prevailing consensus is that Buffett was not the original decision-maker when Berkshire first bought shares in 2016. That distinction probably lies with his co-investment managers Todd Combs and Ted Weschler.
But there can be no question that Buffett has a high conviction now about Apple, based on Berkshire’s huge asset allocation. As Buffett said earlier this year: “Apple is different than the other businesses we own. It just happens to be a better business.”
Given his conviction, is Apple stock worth buying today?
Buffett sees a durable competitive advantage as the most important quality a business can possess, and Apple has that in spades. It ranks as the second-most-valuable brand in the world in 2023, according to consultancy Brand Finance, and its brand authority is the source of tremendous consumer loyalty and pricing power.
Buffett called attention to those qualities during a CNBC interview earlier this year: “If you’re an Apple user and somebody offers you $10,000, but the only proviso is they’ll take away your iPhone and you’ll never be able to buy another, you’re not going to take it.” Not many companies have a product that is so highly prized among consumers.
Apple has earned a strong market presence in several consumer electronics verticals. First and foremost, it is the largest smartphone manufacturer in the U.S. (55% market share in the third quarter) and the second-largest worldwide (16% market share in the third quarter). Apple is also the fourth-largest personal computer (PC) manufacturer, and it leads the market in tablets and smartwatches.
That creates a path to mid-single-digit growth in device revenue in the coming years as the broader consumer electronics market is expected to grow at 6.6% annually through 2030, according to Grand View Research.
But Apple has an installed base north of 2 billion active devices, which creates a monetization opportunity via services like App Store sales, financial products (Apple Pay), and various subscription products like Apple Music. The company has a strong presence in a few of those markets. Most notably, Apple Pay is the most popular in-store mobile wallet among U.S. consumers, and the App Store earns twice as much revenue as its closest competitor, the Google Play Store.
That creates a path to low-double-digit growth in services revenue in the coming years as mobile app sales are expected to increase at 9% annually through 2027 and the U.S. mobile payments market is projected to increase at 13% annually over the same period.
Apple beat expectations on the top and bottom lines in the fiscal fourth quarter (ended Sept. 30), but the results were mediocre at best. Total revenue fell for the fourth consecutive quarter, dropping about 70 basis points. That decline was due primarily to a 34% drop in Mac sales and a 10% decline in iPad sales. But meager 3% growth in iPhone sales certainly didn’t help the situation.
On the bright side, Apple reported 16% sales growth in its high-margin services business, and the company repurchased more than $15 billion in stock during the quarter. As a result, GAAP earnings increased 13% to $1.46 per diluted share.
Apple is a well-managed business that has consistently created value for shareholders. The stock is up 271% over the last five years, nearly quadrupling the S&P 500‘s total return. But I am skeptical as to whether the company can deliver market-beating returns from its current valuation.
Apple stock trades at just under 30 times earnings, a premium to its five-year average of 25.8 times earnings. Worse yet, Wall Street expects Apple to grow earnings per share at 9.8% annually over the long term. That forecast makes its current valuation multiple look expensive.
Personally, I would wait for a cheaper price. But Buffett clearly has immense confidence in the company, so I certainly wouldn’t fault investors for buying a small position in Apple stock today.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, and Microsoft. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
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