Of all the stocks that Warren Buffett's Berkshire Hathaway owns, few are regarded as highly as Apple (AAPL -0.35%), which makes up nearly half of Berkshire's portfolio. Furthermore, the conglomerate appears comfortable loading up on the stock, as Berkshire purchased an additional 20 million shares during the first quarter, increasing its stake by about 2%.
That was only one of six stocks Berkshire purchased in Q1, so clearly, Berkshire sees some value. But is it really the best Buffett stock to purchase right now? Let's find out.
Apple's iPhones are the primary business driver
Apple's products have taken over the personal consumer electronics segment in the U.S. With a 53% market share in the U.S., Apple now holds the majority of this market. Furthermore, 79% of consumers age 18 to 24 prefer Apple's operating system to Android.
It's not hard to extrapolate that preference to younger generations, which means that most new users will likely gravitate toward Apple products as they age. That's a slow-moving catalyst, but it is one to watch over the next decade.
A shorter-term trend is the upgrade cycle. Apple's iPhone sales have been relatively steady over the past few quarters, with Apple's latest quarter (the fiscal second quarter, ended April 1) only seeing a 1% rise in iPhone sales. Still, this slight rise was enough for Apple to notch a new record Q2 in iPhone sales.
But where is the growth? If more consumers are switching to Apple from Android, plus a new generation is much more likely to choose Apple products, it should be putting up better growth numbers. The answer is likely that most people haven't upgraded their phones in a few years.
While performance jumps from year to year used to be massive, that's no longer the case. As a result, consumers can hold on to their phones for a little bit longer. Plus, with inflation pinching everyone's wallets, a new phone can likely wait for a year. As a result, there could be a wave of people upgrading their phones over the next few cycles, which would be a significant growth driver for the company.
However, does that still justify its stock price?
The stock is too expensive for the growth it delivers
Apple's stock is very expensive and is quickly approaching the highs last reached right before tech crashed in late 2021.
AAPL PE Ratio data by YCharts
However, in 2021, Apple was at least growing at a respectable pace. Now its revenue is shrinking, yet somehow it deserves to trade at a premium? That doesn't make a whole lot of sense.
Even if you factor in forward-looking guidance, Apple is only expected to deliver $5.98 in earnings during fiscal year 2023. In fiscal 2024, revenue is only expected to rise by 6.5%, with $6.57 in earnings. That values Apple's stock at 29 times fiscal 2024 earnings -- a costly price for a company that is hardly growing its revenue or earnings.
As for the question: "Is Apple the best Buffett stock to buy right now?" My answer would be a resounding no. Apple's stock isn't anywhere close to reasonably valued and doesn't put up the growth to justify the price tag.
Although Apple's products dominate the market, the company is butting up against its sheer size, making it difficult to produce meaningful growth. Until Apple's valuation falls to a mid-20s price-to-earnings ratio or the growth picks up to faster than market pace, I think Apple is a stock that investors should hold rather than buy.
