Warren Buffett's investing strategy is well-known by now. The nonagenarian investor likes businesses that have strong brand recognition, loyal customers, and of course, outstanding financials. Look through Berkshire Hathaway's equities portfolio and you'll quickly see that many of the stocks fit this description.
At the top of the list is none other than Apple (AAPL +2.94%), which currently represents just under half of Buffett's roughly $366 billion portfolio. The conglomerate first bought this top FAANG stock in early 2016, and it has been a truly wonderful investment since then.
Let's take a closer look at what makes Apple such a dominant enterprise and whether or not it makes for a worthy investment today.
NASDAQ: AAPL
Key Data Points
The Apple of Buffett's eye
Apple is considered Buffett's first foray into the tech space after IBM, a sector he long avoided, maybe because he didn't fully understand certain companies or because their valuations were too excessive. But after doing his due diligence, he came to the conclusion that the Apple story is more about having a powerful consumer brand than anything else.
The company's popular products, like the iPhone, Watch, and AirPods, are in such high demand that consumers are willing to pay premium prices for them not just once but every time new versions come out. And Apple's growing Services segment, which carries a gross margin of over 70%, drives greater stickiness from consumers by keeping them engaged in its ecosystem.
Buffett even said that if you offered an Apple customer $10,000 to stop using an iPhone for good, they most likely would decline that offer. This eye-opening perspective is only possible because Apple has created such a unique combination of beautiful hardware supplemented by easy-to-use software.
I don't think there's any doubt that Apple satisfies another key investing criterion that the Oracle of Omaha looks for, too, and that's its superb financials. Apple not only generates significant amounts of net income, but it produces an insane amount of free cash flow (FCF). In the last three fiscal years (2020, 2021, and 2022), the tech giant registered a whopping $278 billion of FCF in total. That's more than the gross domestic product of countries like Portugal, New Zealand, and Peru.
This has afforded Apple the ability to return lots of capital to shareholders. The outstanding diluted share count has been reduced by 22% in the last five years, boosting the per-share earnings for existing investors. And Apple even pays dividends, doling out $7.4 billion in the first six months of fiscal 2023. This means Buffett's 5.8% stake in the company resulted in roughly $429 million of passive income for Berkshire during that time. This income stream has certainly increased over the years.
Should you buy Apple?
Since the start of 2016 through June 23 of this year, Apple's stock price has skyrocketed 304%. And it's even up 44% in 2023 alone. For a business that carries a gargantuan market capitalization of nearly $3 trillion, these types of gains are incredible. It is the largest stock out there, yet it continues to outperform.
Investors might immediately want to go out and buy shares, but it's worthwhile to consider Apple's current valuation. As of this writing, shares trade at a price-to-earnings (P/E) multiple of about 32. That's much more expensive than the stock's trailing-five-year average P/E ratio. It's important to point out that when Buffett was accumulating his first shares in Apple, the stock sold at an average P/E of 10.6 during the first three months of 2016.
Paying roughly triple the valuation that Buffett first paid for Apple seems like a risky bet even though this is obviously one of the most successful companies in the world. Apple generated almost $400 billion of revenue in 2022, so the single biggest question mark is how much growth investors can really expect going forward.
But if you're comfortable with the valuation and instead prioritize the wonderful qualitative characteristics that this business possesses, then adding Apple to your portfolio could be the right thing to do.
