Throughout his illustrious investment journey spanning multiple decades, Warren Buffett has possessed a multitude of enterprises, not just during his time in partnerships but also as the chief executive officer of Berkshire Hathaway. His remarkable history of achievements has captured the interest of individual investors in search of fresh inspiration.
Acquired initially in the early months of 2016, Apple (AAPL) has evolved into one of Buffett’s most triumphant ventures, gauged not solely by the percentage gain but also by the substantial monetary advancement achieved. The stock has surged an impressive 577% since the commencement of 2016, overshadowing the 171% upswing in the Nasdaq Composite Index.
At the time of composing this, Apple constitutes a significant 46% of Berkshire’s complete portfolio of publicly traded stocks, boasting a market valuation of $163 billion. Evidently, the Oracle of Omaha maintains a strong affinity for the consumer technology powerhouse.
Buffett’s Standards
Understanding why Buffett was initially motivated to invest in Apple’s stock isn’t a complex task. The company has maintained a robust consumer brand over an extended period, courtesy of its immensely popular hardware offerings such as the iPhone, iPad, and Watch. While hardware sales constituted 74% of the revenue during the third quarter of fiscal year 2023 (concluding on July 1), the services sector is progressively gaining prominence, thereby contributing significantly to the overall picture. This evolution has resulted in the formation of a highly cohesive ecosystem.
Within Berkshire’s portfolio, a constellation of influential consumer brands is evident, seamlessly aligning Apple as a fitting addition. Among these top-tier holdings rests Coca-Cola, reaping the rewards of its global renown and established capacity to dictate prices, mirroring Apple’s position.
Undoubtedly, Buffett holds in high regard Apple’s immaculate financial standings, evident in its current net cash balance of $57 billion. This provides the company with the essential fiscal agility to navigate economic downturns, all the while fueling further investments in groundbreaking technological advancements. In the previous fiscal year, Apple generated a remarkable $111 billion in free cash flow, a degree of remarkable profitability to which shareholders have become accustomed.
In addition to its evident positive attributes, Apple’s stocks were exceptionally affordable when Buffett made his initial investment, with an average trailing price-to-earnings (P/E) ratio of 10.6 in the initial quarter of 2016. Valuation holds paramount importance for the Oracle of Omaha, and he was swift to seize the chance that the market presented him with several years ago.
Apple’s Future
Back when Buffett initially invested in Apple shares, he benefited from their highly attractive valuation. However, for investors observing from the sidelines today, the situation has changed. Despite a 9% decline in August, the stock has managed to maintain a 36% increase in value throughout 2023 (as of August 16). As a result, the shares are currently trading at a trailing price-to-earnings (P/E) ratio of 29.9. This not only surpasses Apple’s average valuation over the past decade but also represents a substantial 50% premium compared to the S&P 500 index’s trailing P/E ratio of 20.4.
At present, Apple commands a market capitalization of approximately $2.8 trillion, and its operations yielded $394 billion in revenue during fiscal year 2022. The substantial valuation, combined with the company’s already immense scale, might potentially curtail its future growth prospects. This sentiment is mirrored by Wall Street analysts, who project a modest annualized growth rate of 6% for revenue and 8% for earnings per share between fiscal 2022 and fiscal 2027.
For potential investors contemplating the purchase of shares, it’s crucial to evaluate how Apple can significantly impact its financial performance. The company’s CFO, Luca Maestri, noted the presence of over 2 billion active Apple devices worldwide. While it’s true that consumers have displayed a consistent interest in acquiring upgrades to the company’s popular hardware offerings, a valid point can be raised that achieving double-digit revenue growth might prove challenging in the coming decade. This is the case even when considering initiatives in augmented reality/virtual reality (AR/VR) and the potential boost from artificial intelligence.
Berkshire Hathaway, under Buffett’s guidance, remains a significant stakeholder in Apple, potentially prompting investors to consider mirroring the moves of this seasoned market expert.
Summary
Warren Buffett’s history of successful investments spans decades, with Apple being a standout. Bought in 2016, its stock surged 577%, making it a triumph. Apple’s now 46% of Berkshire’s portfolio, valued at $163 billion, reflecting Buffett’s confidence. The company’s strong brand, popular hardware, and evolving services sector make it appealing. However, its massive $2.8 trillion market cap and $394 billion revenue raise questions about future growth potential. Still, Berkshire’s continued stake underscores its enduring allure.
