Warren Buffett is one of the greatest business minds in American history. Under his leadership, Berkshire Hathaway stock compounded at 20% annually for nearly six decades, growing twice as fast as the S&P 500. Very few companies ever achieve that rate of success, and much of the credit goes to Buffett and his ability to identify rewarding investments.
Indeed, Buffett engineered dozens of savvy acquisitions over the years, and he helped Berkshire build a $328 billion equity investment portfolio. But investors may be surprised to learn that a single stock accounts for 46% of that total. Berkshire had $151 billion invested in Apple (AAPL 0.62%) as of the March quarter.
Apple is one of seven companies that have recently been dubbed the "Magnificent Seven" by Wall Street. The others are listed below:
- Microsoft
- Alphabet
- Amazon
- Nvidia
- Tesla
- Meta Platforms
The truly magnificent thing about the Magnificent Seven is the wealth they have created for shareholders. Those seven companies are collectively worth more than $11 trillion, and Apple is the largest of the bunch with a market cap of $3 trillion. Yet, Berkshire has never sold a single share of Apple stock, implying that the company and Buffett see plenty of upside still to come.
Apple reported mixed results in the third quarter
Apple delivered better-than-expected financial results for the fiscal third quarter (ended July 1), but its performance was far from extraordinary. Total revenue decreased 1.4% year over year to $81.8 billion, the third consecutive year-over-year decline in quarterly revenue, as weakness in the iPhone, Mac, and iPad segments more than offset strength in the services segment.
On the bright side, Apple continued to become more profitable. While revenue declined, gross profit increased 1.5% year over year to $36.4 billion as high-margin services accounted for a large chunk of total sales. That margin expansion trickled down to the bottom line, where GAAP net income climbed 2.3% to $19.9 billion. But earnings actually jumped 5% to $1.26 per diluted share as the company continued to buy back stock.
Image source: The Motley Fool.
Looking ahead, management expects sales in the iPhone and services segments to accelerate in the fiscal fourth quarter.
Apple has a durable competitive advantage
Warren Buffett sees a sustainable competitive advantage as the most important quality any business can possess. Competitive advantages come in different shapes and sizes, but they generally boil down to pricing power. A business that can raise prices without losing market share to the competition is a good business, according to Buffett, and he believes Apple has pricing power in spades.
Buffett made his point in a CNBC interview earlier this year: "If you're an Apple user and somebody offers you $10,000, but the only proviso is they'll take away your iPhone and you'll never be able to buy another, you're not going to take it," he said. Very few companies inspire that type of consumer loyalty or possess that kind of pricing power, but Apple is no ordinary company.
The investment thesis for Apple
The Apple brand is synonymous with premium devices, and the company enjoys a strong market presence in several consumer electronics verticals, including a leadership position in smartwatches and tablets. But the iPhone is the real breadwinner. Apple is the second-largest smartphone manufacturer in the world, and its market share has climbed 700 basis points to 17% over the last four years, while Samsung has only managed to tread water at 22%. That puts Apple in a good spot. The global smartphone market is expected to increase at 6.8% annually through 2030.
However, the company has more exciting growth opportunities on the services side of its business, where Apple monetizes its installed base of 2 billion active devices with higher-margin products like cloud storage, mobile app store content, streaming media, and financial services. Apple has a particularly strong foothold in two of those markets. The Apple App Store earns twice as much revenue as its closest competitor, and Apple Pay is nearly three times as popular among U.S. consumers as the next closest in-store mobile wallet.
That puts the company in a good position. The global mobile app market is expected to grow at 13.8% annually through 2030, and the U.S. mobile wallet market is expected to grow at 26.7% annually over the same period.
Is Apple stock worth buying?
Given the industry forecasts, investors can reasonably expect Apple to grow hardware revenue and services revenue in the mid-single digits and low double-digits, respectively, through the end of the decade. That gives Apple a good shot at growing total revenue between 6% and 9% annually over the same period.
However, its bottom line should grow more quickly because services revenue earns higher margins and the company consistently repurchases shares. Accounting for that, Apple has a good shot at growing earnings per share between 10% and 15% annually through 2030.
With that in mind, Apple stock currently trades at 32 times earnings, a premium to its three-year average of 24.7 times earnings. I question whether Apple can deliver market-beating returns over the next five to 10 years starting from that valuation, but Buffett evidently thinks otherwise. Investors eager to own this stock should start with a very small position.
