Great investors can be an excellent source of inspiration, and Warren Buffett is undoubtedly a great investor. His many shrewd decisions have molded Berkshire Hathaway into one of the largest companies in the world, and his uncanny ability to pick winning stocks has helped Berkshire amass an equity securities portfolio worth $353 billion.
Some investors may be shocked to learn that $178 billion of that total (or 50%) is invested in a single stock, Apple (AAPL -0.69%), as of the end of June. Berkshire first took a stake in the Cupertino-based company in 2016, and the position has steadily snowballed over the years. Given its size today, there is only one logical interpretation: Buffett is incredibly bullish on Apple.
Is now a good time to buy?
Apple had a humdrum third quarter
Apple reported mediocre financial results in the third fiscal quarter (ended July 1) despite beating expectations. The company suffered its third consecutive decline in quarterly sales as revenue dropped 1.4% year over year to $81.8 billion. That decline was driven by falling sales across the iPhone, Mac, and iPad product lines, though it was offset to some degree by strength in the services segment.
CFO Luca Maestri said Apple crossed 1 billion paid subscriptions in the quarter, nearly double what it had just three years ago. Services revenue increased 8% to $21.2 billion, and because services earn higher margins than hardware, gross profit margin climbed about 120 basis points to 44.5%. That dynamic, coupled with $18 billion in share repurchases, allowed generally accepted accounting principles (GAAP) earnings to rise 5% to $1.26 per diluted share despite a decline in total revenue.
Looking ahead, Apple has modest growth opportunities in hardware, but its services segment is another story.
Apple has modest growth opportunities in hardware
Apple has carved out meaningful market share in several consumer electronics verticals. It currently ranks as the second-largest smartphone manufacturer worldwide, but it added 700 basis points to its market share in the last five years, while the leader, Samsung, has failed to gain ground. Apple is also the largest smartwatch manufacturer in the world and the fourth-largest personal computer vendor.
So what? The smartphone market is projected to expand at 7% annually to hit $978 billion by 2030, while the smartwatch market is forecast to increase at 8% annually to reach $72 billion during the same period. Meanwhile, the personal computer market is expected to grow at 9% annually to reach $289 billion by 2028. Apple should be able to match those growth rates at a minimum, meaning hardware revenue should grow in the mid-single digits through the end of the decade.
That said, Apple recently announced a virtual reality (VR) headset that will be available next year, entering a market that Grand View Research says will grow at 31% annually to reach $60 billion by 2030. If the Apple Vision Pro catches fire, hardware sales growth could outpace that mid-single-digit range.
Apple has more considerable opportunities in services
Apple recently surpassed 2 billion active devices. That installed base is the foundation of its services business, which provides additional monetization opportunities through the App Store, iCloud, and Apple Pay, as well as subscription products like Apple TV+ and Apple Music. As mentioned, the services business is growing more quickly, and it earns higher margins than the hardware business, meaning Apple should become increasingly profitable over time.
The company has a particularly strong presence in two service categories: mobile app downloads and mobile wallets. The Apple App Store holds twice as much market share as Alphabet's Google Play Store, and Apple Pay is the most popular in-store mobile wallet by a wide margin among U.S. consumers.
Meanwhile, the company is also gaining ground in digital advertising. According to eMarketer, Apple will rank as the fifth-fastest-growing digital advertiser in the U.S. this year, outpacing industry leaders Alphabet, Meta Platforms, and Amazon.
So what? Global mobile app sales are projected to climb 14% annually to reach $567 billion by 2030, while U.S. mobile wallet revenue is expected to increase 27% annually to reach $8 billion during the same period. Meanwhile, the digital ad market is forecast to grow at 9% annually to hit $1.2 trillion by 2030. Collectively, that hints at low double-digit sales growth in Apple services through the end of the decade.
Is Apple stock worth buying?
As discussed, Apple has a reasonable shot at mid-single-digit sales growth in hardware and low double-digit sales growth in services through 2030. But earnings should grow even faster, perhaps in the mid-teens, due to rapid expansion of the high-margin services business and regular share repurchases. Indeed, Apple's earnings increased nearly 18% annually over the last five years. Yet, investors should carefully consider its valuation.
Apple currently trades at 29.6 times earnings, a premium to the five-year average of 25.3. I question whether the company can grow quickly enough to produce market-beating returns given its current valuation, so I would recommend waiting for a more reasonable entry point. But Buffett clearly disagrees, and investors who choose to buy Apple stock today can take solace in knowing that Berkshire owns a good chunk of the company.
