Shares of Apple (AAPL 0.52%) have produced a remarkable return of 282% over the past five years, easily crushing the S&P 500 by a wide margin. And even in 2023, the stock is up 38%. As of this writing, the business carries a market cap of $2.8 trillion, making it the largest company in the world according to this metric.
Even though Apple is a household name today, some investors may be wondering if the business should be in their portfolios. Let's look at three reasons you might want to buy Apple stock, and one reason to sell.
1. It's endorsed by top investors
A beneficial course of action for retail investors is to look at what some of the top investors own. Managers of large funds have to report their portfolio positions every quarter with the Securities and Exchange Commission in a filing called a 13F. Unsurprisingly, Apple is a top holding among some of the best investors, thanks to its size and outstanding performance.
Warren Buffett, whom many consider to be the best capital allocator ever, is a huge fan of Apple. The conglomerate he runs, Berkshire Hathaway, which has typically shied away from tech companies, started buying the stock in the first quarter of 2016. The exact timing of the purchase isn't known, but since the start of 2016 to May 31 of this year, Apple shares are up an incredible 579%.
As of March 31, 48.3% of Berkshire's portfolio was in Apple. Following in the Oracle of Omaha's footsteps might be a good enough reason to buy the stock, or at least take a closer look at the business.
2. It has a wide moat
Apple's economic moat, or its characteristics that allow the business to maintain its competitive edge over its rivals, comes primarily from its powerful brand. Selling must-have products and services that are easy to use, work well together, and create an ecosystem with other consumers has allowed the company to charge premium prices for what it sells. Its gross margin has averaged a superb 40% over the past five years, indicative of proven pricing power.
And that ecosystem has resulted in switching costs for customers. The iPhone gets all of the attention, as it should. But services like Apple Pay, Apple Music, and Apple TV+, among others, keep users engaged, stuck, and unlikely to switch. Consequently, Apple's competitive advantages are so powerful that it's impossible to see any company disrupting its dominance anytime soon.
3. Its financial prowess
Strong stock returns over extended periods are only possible if the underlying business performs well at a fundamental level, and Apple shines in this regard. That previously mentioned pricing power has resulted in an enterprise that prints cash. In fiscal 2022 (ended Sept. 24), Apple generated free cash flow of $111 billion, something it has no problem doing consistently.
Even after reinvesting in the business, Apple has done a wonderful job of rewarding its shareholders. Over the past five years, the company has reduced its outstanding share count by close to 20%. And management just announced a new buyback authorization of $90 billion. What's more, it just raised its quarterly dividend for the 11th straight year.
As of April 1, the company had $166 billion in cash, equivalents, and marketable securities on its balance sheet. In times of heightened economic uncertainty, its strong financial position gives investors peace of mind.
The reason to sell: Apple is a massive enterprise
Apple has numerous attractive characteristics that every investor dreams about, but the company's sheer size today presents a reason to sell the stock.
Right now, its market cap is $2.8 trillion, as I mentioned earlier. And over the past 12 months, the business reported revenue of $385 billion. Eventually, the law of large numbers presents itself and becomes a headwind. This means Apple's growth prospects are limited.
In the last two fiscal quarters, sales declined year over year. The leadership team expects this to happen again in the current quarter. And over the next five fiscal years, Wall Street consensus analyst estimates call for revenue to rise at a compound annual rate of just 5.4%. For investors focused more on growth, this is a valid reason to sell the stock.
