When examining Warren Buffett's Berkshire Hathaway investment portfolio, it's hard to deny what his favorite stock is. With around 45% of the portfolio wrapped up in Apple (AAPL 0.64%) stock, it's pretty clear he prefers this company over others (especially considering the next-highest weight in his portfolio is 9%).
However, Apple just did something it hasn't done in seven years. The problem is, what it just did isn't a good thing; it's pretty bad. So is this business blunder Apple just experienced enough to knock it off its perch as the world's most valuable company and Warren Buffett's favorite? Read on to find out.
Apple's revenue decline has some investors worried
Apple, the maker of high-end technology like the iPhone, Apple Watch, iPad, MacBook, and more, is tied heavily to consumer sentiment. When the consumer is flush with cash, they are willing to spend increasingly more money on Apple's products. But Apple's sales struggle when funds tighten up, and the future isn't as rosy.
This is a similar pattern to what the U.S. experienced in 2016 and has been renewed in 2023. Apple recently reported its Q3 FY 2023 earnings (ending July 1) and reported its third-straight quarter of revenue decline, something it hasn't done since 2016. However, the situation isn't nearly as dire as in 2016, as Apple's revenue only declined by 1.4% in Q3 and saw a low point of 5.5% decline in Q1. Compared to the 15% revenue decline Apple experienced at its low in 2016, this is a walk in the park.
Still, revenue only declined for three quarters in 2016, but Apple's management expects to hit four quarters in a row if the economy doesn't improve. Now it expects the decline level to be about the same level as Q3, but this is still concerning to investors.
Even though Apple's revenue is slowly ticking down, its margins are improving. In Q3 2022, it had an operating margin of 27.8%. In Q3 2023, that ticked up to 28.1%. This slight increase allowed Apple's earnings per share to rise from $1.20 last year to $1.27 this year -- 6% growth.
While the revenue decline is slightly concerning, the fact that Apple grew its earnings demonstrates why it has become one of the strongest companies on earth.
But Apple's premium valuation may hinder stock price growth.
The stock is valued at a high level despite lackluster growth
While Apple certainly has earned a premium due to its strong execution even during rough times, it might be too much. At 30 times earnings, Apple's stock is expensive, especially considering its slow earnings growth pace.
AAPL PE Ratio data by YCharts
While the company has pulled back from its recent 33 times earnings high, it's still far above where Apple traded throughout most of its history. Furthermore, anytime a company's price-to-earnings ratio is in the mid- to high-20s range, it typically grows its revenue at an above-market average pace. Apple hasn't done that since the pandemic caused a sales spike, and its high valuation may be an issue for future returns.
Although Apple is an incredibly resilient and robust company, I won't be an Apple investor until its revenue accelerates to a market-beating pace or the valuation drops to a more reasonable low 20 times earnings. Too many stocks are valued at lower levels and growing faster than Apple, and I'd rather invest in those companies.
