In a recent episode of The Rank on Fool Live, longtime Fool.com contributors Matt Frankel, CFP, and Jason Hall ranked the 10 largest holdings of Berkshire Hathaway (BRK.A 0.07%) (BRK.B 0.10%). And although Apple (AAPL -0.34%) is Berkshire's largest stock position by a wide margin, the pair ranked it as their No. 5 stock out of the group. In this clip, recorded on Aug. 30, hear our two experts' rationale for their ranking.
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Jason Hall: Matt, I was a little surprised that Apple came in at No. 5.
Matt Frankel: Surprised to the upside or downside?
Hall: Yes. I'm not sure, I guess it's one of those things that, it probably gets back to the fact that you and I are philosophically similar when it comes to thinking about businesses like Apple. But if you were to go back four or five years ago, I probably would have rated it No. 5 at that time as well, and maybe you would have rated it higher. Again, this is a business that we know what Apple does. We know it's really still largely tethered to the iPhone, not just because it's its biggest seller, it generates the lion's share of its profits because it's also super high-margin for an electronic device, but also because I think sometimes, Matt, we miss that it's where most of its services revenue that the company tells us being so important and they are so important to its future those services revenues largely flow through the iPhone. If you were to think about the implications of iPhone beyond just the iPhone's profits, it's the thing that generates 80% of the company's profits overall, right?
Frankel: Right. Well, I think of Apple in the context of Coca-Cola, but with more upside potential. I think that the Apple's core products are Coca-Cola, the iPhone, the iPad, the wearables, things like that, great business, great pricing power, great distribution, but then you have the service side of the business. That's high-margin, a lot of room for growth, these things like Apple Music if you're familiar with that, Apple TV is in there. There's a lot of things, the app stores, all that revenue's in the services division. That has a lot of growth potential and it's growing quickly. Massive company, limited upside potential for sure. But I think it does have market-beating return potential at this point. I own Apple, this is the first one we've talked about that I actually own. I sold half of my stake not that long ago just because it was getting a little too big for my comfort level compared to its potential. But I still feel like this has market-beating potential. I am actually not an Apple customer, I'm a shareholder. I do not use an iPhone or have an Apple laptop or computer or anything like that. But, most loyal customer base of any company I can name, great margins. I don't see consumer taste changing away from it is another key difference between Coca-Cola. I'm not sure that I'm going to be an Apple shareholder forever, but I understand why Buffett is. I was very shocked that it became his biggest decision and that he held as much as he did, since it became his biggest decision. They actually sold some recently and Buffett called that a mistake. What is it? Almost a quarter of the company's market cap, I believe.
Hall: Yeah. It's absolutely enormous. About a $122 billion roughly.
Frankel: It's more than a fifth of Berkshire's market cap.
Hall: Yeah, that's incredible. Again, the reasons to own this company. You think about it, it's easy to look at that $2+ trillion market cap, and well, there is a lot of downside risk here. But if you're Berkshire, and you're focusing on the business, is most of assuring thinking about that risks. Matt, you nailed it. I said eight or nine years ago that Apple had transcended from being a tech company to being a powerful consumer brand. It was on the basis of its tech, it's beautiful to look at, it's elegant to hold, it's wonderful to use. They focus so much on that product and delivering a product that you could say that Apple has been disruptive at times. You think about the iPod, that was a disruptive product. Then the iPhone when it was first launched, was disruptive, but also wasn't new. It wasn't the first to market, it was the best to market. What Apple does really well is not necessarily innovating, at this point, it's perfecting, it's taking things and integrating them into a product that consumers love. I think it's easy to think about it. It still is a tech company I think, well, this is a company that's at risk of being disruptive. But I think that to your point, its users are very loyal. I'm an Apple -- I don't own the company -- I own their products and I love the products because they just work and they work very well and they're focused on security. I don't think it necessarily gets enough credit. Like that walled garden, I see it as an absolute feature and I love it. To me, it's a reason to own Apple products. The cash flows they generate because of that, they own 100% of the smartphone market's profits. The companies that make the phones, they own 100% of the profits. Even though their market share has fallen substantially over the past decade, their share of the profits has grown. I'm going to stop rambling. That's the reasons that Apple is worth owning.