Because he has one of the most successful track records, Warren Buffett is a legend in the world of finance. The investment movements he makes as manager Berkshire Hathaway are watched by both amateurs and professionals.
More recently, Apple (NASDAQ:AAPL) is arguably the best stock held by the conglomerate. Berkshire initially purchased shares in the first quarter of 2016. Since the start of that quarter through June 18, 2024, shares of this consumer technology titan have soared 714%. This monster gain made Apple Berkshire’s largest holding company, accounting for a staggering 43% of the market. massive $390 billion portfolio.
Much can be learned by examining Buffett’s decision-making process when he first chose to buy the “Magnificent Seven” stock. Investors should then view things with a new perspective to see if these factors still hold true and could make Apple a smart buy today.
The apple of Buffett’s eye
Going through case studies to try to understand why Warren Buffett decided to buy Apple can reveal information that the average investor can use in their own process. Looking at Berkshire’s purchasing of technology stocks at the time, I can identify some key attributes that could have influenced the Oracle of Omaha.
Apple was a small company almost a decade ago, but it still had one of the most powerful brands in the world. The company’s popular hardware products, including the iPhone, have fostered customer loyalty. But thanks to Apple’s software and services, a powerful ecosystem was created that discouraged customers from switching to competing platforms.
This brand recognition and customer loyalty has helped generate enormous pricing power. This was demonstrated by Apple’s fiscal 2015 gross margin of 40.1%. It seemed that customers were willing to pay for expensive products.
Apple’s finances were in perfect shape when Buffett first bought the stock. In fiscal 2015, the company generated net income of $53 billion, representing a stellar profit margin of 22.8%. And Apple had $206 billion in cash, cash equivalents, and marketable securities, compared to $56 billion in long-term debt (as of September 26, 2015). This was not a company in financial difficulty.
Warren Buffett loves buying high-quality businesses. But he will only do so if the price is right. During the first quarter of 2016, Apple shares traded on average price/earnings ratio (P/E) of just 10.6. No, that’s not a typo. Looking back, this looks like a real bargain.
Is it too late to buy Apple stock?
Clearly, Apple has proven to be a fantastic investment decision for the Oracle of Omaha. And today, it makes up a large portion of Berkshire Hathaway’s public stock portfolio. But investors shouldn’t automatically buy the stock. The current setup is not the same as when Buffett first bought stocks.
Apple is a more mature company in 2024 than it was in 2016. That means its growth prospects are a bit more limited. Sales declined 2.8% in fiscal 2023, and they fell again in the second quarter of fiscal 2024.
For these weaker growth trends, investors are asked to pay a price-to-earnings ratio of 32.7. This is a ridiculously high valuation, 53% higher than the average P/E multiple of Apple shares over 10 years. And the current valuation is three times what it was when Buffett first added Apple to Berkshire’s portfolio.
Based on the valuation, expectations remain high for this company and its future. However, future revenue and profit gains likely won’t look like the past. It’s undoubtedly a great company, but it doesn’t seem like a wise investment today.
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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Apple and Berkshire Hathaway. The Mad Motley has a disclosure policy.
More than 43% of Berkshire Hathaway’s $390 billion portfolio led by Warren Buffett is invested in a single stock. was originally published by The Motley Fool
