If you look at Warren Buffett's Berkshire Hathaway, you can see a clear preference for one company: Apple (AAPL -2.19%). Berkshire's stake in the company is worth over $156 billion -- an incredible 47% of its investment portfolio. With Berkshire's $700 billion market cap, it's not unfair to say that over a fifth of the company is Apple.
While most investors would be uncomfortable with that concentration level, Berkshire clearly isn't. It added 20 million more shares (about a 2% increase in its stake) during the first quarter. So should you follow Buffett's example with Apple, or are there better investments out there? Let's take a look.
Is Buffett forsaking his value-investing roots?
Apple's products have become a staple for the American consumer. Whether it's a MacBook, AirPods, or the ever-popular iPhone lineup, Apple has successfully launched and developed a product ecosystem few companies could ever dream of achieving.
It has also been responsible with its finances, garnering praise from Buffett and his right-hand man, Charlie Munger, for many years.
These two, along with many in the financial media, have cheered investors on to own more Apple stock, since it has been one of the best-executing businesses since Buffett established his position in 2016.
To be clear, this investment has worked out well over the past decade, with a total return of 629% versus the S&P 500's 135%. But the price of Apple's stock makes me scratch my head at Buffett's latest move, since he is a famous value investor.
When Berkshire first bought Apple in 2016, the stock had a dirt cheap price-to-earnings (P/E) ratio of 12. Now, it's valued at around 30 times earnings.
AAPL profit margin, data by YCharts.
This valuation increase isn't entirely due to widespread coverage of Apple stock ownership; a lot of it has to deal with the company's improving profitability. Even though it has only moved up 3 percentage points, when the company generates nearly $400 billion in revenue, that works out to $12 billion more in profits -- a massive increase.
Still, is that enough to warrant a valuation near 30 times earnings? I don't think so.
Apple isn't putting up the growth needed for its valuation
An earnings multiple of 30 is usually reserved for a rapidly growing company -- something Apple isn't. In fact, its revenue fell nearly 3% in the second quarter (ending April 1). While profit margins stayed relatively stable, its earnings per share fell $0.01 because of the revenue drop.
That revenue drop can be attributed to a weaker consumer, but it also reflects how difficult it is to grow when you have become that large. Even in 2024, when many companies expect the economy to return to strength, Wall Street analysts only project 6.4% revenue growth.
Apple will likely need to grow faster to maintain a premium valuation like that.
So, do I think the stock will come crashing down? Absolutely not. Because of its widespread ownership individually and through index funds (Apple makes up 7.4% of the S&P 500 and 12.5% of the Nasdaq 100), the shares have become insulated from rapid drops, because it would require a lot of investors to sell at once.
But I don't think Apple can deliver the growth it needs. A significant portion of the stock's performance over these past few years has come from multiple expansions, or when investors are willing to pay a more significant premium for the stock.
With that catalyst gone, it has to deliver based on business performance. While it can still succeed at the business level, it won't be as fast as some other companies are growing, which is why I think investors looking for greater upside should look elsewhere.
Still, if you want a steady company as a parking spot for your savings before retirement or to stabilize your portfolio (similar to how Berkshire is doing it), you could do much worse than Apple.
Apple stock has its place in life, but if you're looking for the best possible returns, it doesn't fit the bill from a forward-looking standpoint.
