Investing sage Warren Buffett spent decades investing in sectors such as financial services and industrials. On the surface, having limited exposure to high-growth, flashy technology companies seemed counterintuitive. However, Buffett's investing style has always revolved around cash-flowing businesses. In other words, what good is a company that grows its top line by 50% (or more) if it can't turn a profit?
Well, in 2016 the Oracle of Omaha made a surprising move when he initiated a position in Apple (AAPL -1.22%). Over the last several years, Buffett has built such a large position in the company that Apple is now his top holding.
Let's dig into Apple's business and analyze why the traditionally tech-shy Buffett has evolved into a cheerleader for the iPhone maker.
The company's performance is compelling
Apple recently reported earnings for its fiscal 2023 second quarter ended April 1. At first glance, the financial results look somewhat concerning. While the company reported total revenue of $94.8 billion, and reached an all-time record in services revenue and set a March quarter record for iPhone sales, the top line was still down 3% year over year.
Fortunately for investors, Apple breaks out its revenue by product type. For the March quarter, Apple's sales were down for Mac computers, iPads, and wearables devices. During the earnings call, management explained that foreign exchange headwinds coupled with macroeconomic volatility contributed to the decline in these hardware categories.
Although investors may be concerned about Apple's growth, it's important to step back and take into account the number of variables at play here. And while Apple produces some of the best products and services on the market, there are less expensive alternatives. Given that inflation is still a big concern for the average consumer, it's not entirely surprising to see some lumpiness in quarter-to-quarter performance.
Image source: Getty Images.
Cash flow is king
Despite Apple's revenue decline, the company's ability to generate profits is astounding. For the quarter ended April 1, Apple reported net income of $24.2 billion, down slightly from the comparable period last year. However, Apple's diluted earnings per share of $1.52 was flat year over year.
As a shareholder, I think it's impressive that even in a declining growth environment, Apple still generates tens of billions of dollars in profits in just one quarter. Furthermore, even during challenging economic times, Apple has found ways to deploy these profits creatively.
During the earnings call, investors learned that Apple's board of directors approved a $90 billion share repurchase program. If that weren't compelling enough, Apple also increased its dividend for the 11th year in a row.
Think about this for a minute: Apple's revenue declined year over year and profits were down nominally. And yet, even in a cloudy near-term macroeconomic environment, Apple's management is taking a long-term approach to the business and rewarding investors in the process.
The stock looks like a great buy
At the time of this writing, Apple trades at nearly 28 times its trailing price to earnings (P/E). For context, the long-run average of the S&P 500 is about 15 times P/E. This is an interesting dynamic in that even during a time of declining growth, the capital markets are assigning a premium to Apple stock over the long-run broader market average. Furthermore, Apple is not a growth stock, so it's highly unlikely that investors are buying up the stock in anticipation of high future growth prospects.
Sure, Apple is one of the most innovative companies of all time. It's certainly possible that a new product will hit the market and consumers will flock to buy it. But in my estimation, there's a low probability of that happening.
Apple is one of the pillars of blue chip investments. It's one of those unique companies that is really hard to make a bear case for. There is never a perfect time to buy a stock. Despite Apple trading at a near 52-week high, long-term investors can't really go wrong scooping up some shares.
The long-term road ahead is what should matter most to investors. Perhaps the reason why investors, including Buffett, continue to accumulate shares in Apple is because of its proven ability to generate steady profits and cash flow, and its history of rewarding shareholders. At a time when investors are looking for safe alternatives to high-flying tech stocks or other questionable investments, Apple is as good an opportunity as any despite its quarterly ups and downs.
