Berkshire Hathaway, which has exposure to various industries, including insurance, railroads, and energy, owns a substantial public-equities portfolio. Many investors review this list of holdings to find potential opportunities.
One cannot overlook the fact that Apple represents almost 50% of the Warren Buffett-led portfolio. This investment has been highly successful, with Apple’s shares rising approximately 640% since Berkshire Hathaway first started purchasing the stock in 2016.
Investors can gain insights by understanding what initially attracted Buffett to Apple and evaluating the investment merits of this top FAANG stock from a long-term perspective.
A clear choice
Berkshire Hathaway’s portfolio includes well-known companies like American Express, Coca-Cola, and Kraft Heinz. All these companies share a strong brand presence. This has long been Apple’s key competitive advantage and likely caught Buffett’s attention when he first started buying shares.
The consumer electronics industry is typically challenging due to intense competition and pricing pressure. However, Apple stands out by demonstrating its pricing power and selling its hardware products at premium prices, with consumers willing to pay. This is reflected in Apple’s average gross margin of 41% over the last five years.
Past and present leaders, from Steve Jobs to Tim Cook, have effectively maintained Apple’s brand strength, which likely gives Buffett confidence in the company’s future dominance.
Buffett was also likely impressed by Apple’s financial profile, considering it one of the most profitable enterprises globally. With an operating margin consistently over 24% in the last 10 fiscal years and a return on invested capital of 56.9%, Apple is an exceptional business financially.
Before investing in a stock, Buffett looks for potential for materially higher earnings in the future. Apple’s net income has grown at a compound annual rate of 14.7% between fiscal 2016 and 2023, indicating potential for continued bottom-line expansion in the years ahead.
Another important factor that led Buffett to add this tech stock to Berkshire’s portfolio was its attractively low valuation. In the first quarter of 2016, Apple shares traded at an average price-to-earnings (P/E) ratio of 10.6, making it an obvious buy based on brand recognition and impressive financials.
Apple in the next decade
Before adding Apple to your portfolio, it’s important to evaluate the business with a fresh perspective and determine if it can outperform the S&P 500 in the next decade.
It’s fair to say that there is uncertainty about this outcome. One reason is the company’s slowing growth, with Apple posting a revenue drop of 2.8% in fiscal 2023. This might indicate that the business is in a more mature stage of its lifecycle, partly due to the softer economic backdrop.
Additionally, the current valuation is expensive, with a P/E multiple of about 32, approximately three times higher than when Buffett first bought it.
While it’s possible that this view might be proven wrong, as it stands today, it’s not seen as a smart long-term investment compared to the broader index.
American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
