The powerful technology company has been a major holding of Omaha’s Oracle conglomerate for many years.
Warren Buffett is a financial legend with the most successful track record. As head of an investment company, he has made the following investments: Berkshire Hathaway It is watched by both amateurs and professionals.
Recently, apple (AAPL -1.04%) Apple is arguably the conglomerate’s best-selling stock. Berkshire first purchased shares in the first quarter of 2016. From the beginning of that quarter through June 18, 2024, the consumer tech giant’s shares rose 714%. This incredible increase has made Apple Berkshire’s largest holding, accounting for 43% of the company’s shares. Huge $390 billion portfolio.
Buffett first said,The Magnificent Seven“Stocks. Investors should take a fresh look at things and determine whether these factors still apply and whether buying Apple today is a smart choice.”
Buffett’s Eye
Exploring the case study to see why Warren Buffett initially decided to buy Apple can provide insights that average investors can use in their own investment process. Looking at Berkshire’s purchases of tech stocks at that time, we can identify some key characteristics that may have motivated the Oracle of Omaha.
Apple was a small company a decade ago, but it still had one of the most powerful brands in the world. Its popular hardware products, especially the iPhone, drove customer loyalty, but its software and services created a powerful ecosystem that discouraged customers from switching to competing platforms.
Brand recognition and customer loyalty have contributed to significant pricing power, as evidenced by Apple’s gross margins of 40.1% in fiscal year 2015. Customers appear to be willing to pay more for higher priced products.
When Buffett first bought Apple stock, the company was in very good financial shape. In fiscal year 2015, the company had $53 billion in net income, with a very high margin of 22.8%. Apple also had $206 billion in cash, cash equivalents, and marketable securities, but $56 billion in long-term debt (as of September 26, 2015). The company was not struggling financially.
Warren Buffett loves to buy quality companies. But he only does so when the price is right. In the first quarter of 2016, Apple’s stock price averaged Price Earnings Ratio The price-to-earnings (P/E) ratio is just 10.6. That’s not a typo. In hindsight, this is definitely a bargain.
Is it too late to buy Apple stock?
Clearly, Apple was a great investment decision for the Oracle of Omaha, and today it’s a big part of Berkshire Hathaway’s public stock portfolio. But investors shouldn’t automatically buy the company’s stock; things aren’t the same now as they were when Buffett first bought the stock.
Apple is a more mature company in 2024 than it was in 2016, which means its growth prospects are a bit more limited: Revenue is expected to decline 2.8% in fiscal 2023 and decline again in the second quarter of fiscal 2024.
For these slow-growth trends, investors are being asked to pay a price-to-earnings multiple of 32.7 times — a staggeringly high valuation, 53% higher than Apple’s average price-to-earnings multiple over the past decade, and three times higher than when Buffett first added Apple to his Berkshire portfolio.
Based on the valuation, expectations remain high for the company and its future. However, future revenue and profit growth is unlikely to match what it has in the past. This is undoubtedly a great business, but it doesn’t seem like a smart investment at this point.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
