With a value of $165 billion and a portfolio allocation of 48% (as of March 31), Apple (AAPL 1.04%) is Berkshire Hathaway's largest equity holding by far. The Oracle of Omaha has said that Apple is "different than the other businesses we own." He definitely means that in a good way, which isn't surprising, given the business possesses many of the traits Buffett looks for.
By following one of the best stock market minds ever, investors could meaningfully upgrade their portfolios. Here are three reasons why investors should seriously consider buying Apple stock today, even with shares up 39% this year.
NASDAQ: AAPL
Key Data Points
Burgeoning services segment
While the iPhone represented 54% of the company's fiscal 2023 second-quarter revenue, and it can easily be considered the single most successful product in history, Apple has been growing its services line in recent years. This segment posted revenue of $13.3 billion three years ago in Q2 2020. In the most recent fiscal quarter, its sales totaled $20.9 billion, growing faster than Apple's products segment.
This benefits Apple from a financial perspective. Services carry a superb gross margin of 71%, compared to products, which carry a gross margin of 37%. As more revenue comes from services, the company's bottom line is poised to expand.
But besides the quantitative advantage, Apple's services segment helps the business in another important way -- it drives greater customer loyalty. Readers have probably heard of the Apple ecosystem, which consists of its hardware and software offerings that work so well together. There are currently over 2 billion active Apple devices in the world. Owners of these products have less of a reason to move to competing platforms. That's because Apple's services, including Music, Pay, and TV+, keep users locked in.
Proven pricing power
Buffett is known for saying that the true mark of a wonderful company is its ability to consistently raise prices, with minimal impact on demand. "If you have to have a prayer session before raising the price by 10%, then you've got a terrible business," he once posited.
Apple has no issues with pricing power, and it's probably one of the main reasons that Berkshire Hathaway owns such a large position. The company's flagship product, the iPhone, has generally gone up in price over the years since it first launched in 2007. And what's amazing is that consumers don't hesitate to keep paying up for the newest version.
Even services have undergone price hikes. But by creating beautifully designed hardware products that are differentiated by its own easy-to-use software, Apple has earned its pricing power.
An outstanding financial profile
During what has been a time of heightened economic uncertainty, with inflation still at elevated levels, interest rates rising, and the possibility of a recession on everyone's mind, it's probably worthwhile for investors to focus on owning financially sound companies. Apple fits the bill.
The company's gross margin expanded from 38.5% in fiscal 2017 to 43.3% in fiscal 2022, with the operating margin rising from 26.8% to 30.3% during the same time. That's a wonderful trait to see from a business because it demonstrates that Apple is getting more profitable as it gets bigger, benefiting not just from pricing power, but also from economies of scale as it better leverages its fixed costs and optimizes its expenses. Consumer hardware is known to be a very difficult business financially. Apple has clearly bucked this trend to become a thriving outlier.
The company produces incredible amounts of free cash flow, to the tune of a whopping $111 billion in fiscal 2022. Management isn't shy about returning capital to shareholders. Apple repurchased $39 billion worth of stock during the last six months, and pays a dividend that currently yields 0.5%.
The arguments for why investors should own the stock are extremely strong. Apple could remain a mainstay in your portfolio for years to come.
