Berkshire Hathaway (BRK.A +2.74%)(BRK.B +2.53%) CEO Warren Buffett once said, "Diversification is protection against ignorance. It makes little sense if you know what you are doing." Indeed, he lives by that philosophy: Berkshire has nearly half of its $363 billion stock portfolio in a single company.
For context, Buffett runs 90% of Berkshire's portfolio, and large positions like Apple (AAPL 0.83%), Coca-Cola, Bank of America, American Express, and Chevron are either entirely or primarily under his control, according to Barron's. Meanwhile, his co-investment managers Todd Combs and Ted Weschler handle the other 10% of the portfolio.
The five companies listed above account for an astonishing 75% of the $363 billion that Berkshire has invested in stocks, and Apple alone accounts for 48%. That screams high conviction. Indeed, Berkshire has sold shares of Apple only once (in 2020) since first taking a position in 2016, and Buffett later called the move a mistake. Since then, the company has continued to build its position, buying shares as recently as the first quarter of 2023.
As further proof of his conviction, Buffett recently said Apple is the best business in which Berkshire has a stake. Is the stock worth buying?
Apple has a durable economic moat built on brand authority and proprietary technology
Warren Buffett believes an enduring economic moat is one of the most important qualities a business can possess, and moats generally boil down to pricing power. Apple has that in spades. Its ability to pair appealing hardware, proprietary software, and services creates a unique user experience that has led to profound customer loyalty and brand authority.
Those qualities allow Apple to charge a premium for its products. The average iPhone sells for 3.5 times more than the average Alphabet-owned Android smartphone. Customer loyalty and brand authority have also helped Apple achieve a strong presence in several consumer electronics markets.
Apple is the largest smartphone manufacturer in the U.S. (55% market share) and the second-largest smartphone manufacturer worldwide (16% market share). It is also the fourth-largest personal computer manufacturer globally, and the leader in tablets and smartwatches. Collectively, that hints at mid-single-digit revenue growth in hardware through 2030, simply because the broader consumer electronics market is forecasted to increase at 6.6% annually during that period.
However, those products are only the first half of the equation. The second half is the services ecosystem that Apple uses to monetize its installed base, which currently exceeds 2 billion devices. Those services include App Store sales, iCloud storage, Apple Pay, and subscription products like Apple TV+ and Apple Music, among other ancillary revenue streams.
Apple's services business is particularly compelling because (1) it earns higher margins than the hardware business and (2) the company has a strong presence in several relevant markets. For instance, the Apple App Store makes twice as much money as Alphabet's Google Play Store, and Apple Pay is the most popular in-store mobile wallet among U.S. consumers.
Ultimately, I think Apple could achieve high-single-digit revenue growth on an annual basis through the end of the decade, provided the company continues to draw consumers into its services ecosystem.
Apple's full-year financial performance left much to be desired
Apple reported lackluster financial results in fiscal 2023 (ended Sept. 30) as difficult economic conditions weighed on consumer spending. Total revenue dropped 3% to $383 billion, driven by declines in every device category, offset by a modest increase in services revenue, as detailed below:
- iPhone sales declined 2% to $201 billion
- Mac sales declined 27% to $29 billion
- iPad sales declined 3% to $28 billion
- Wearables, Home, and Accessories sales declined 3% to $40 billion
- Services sales increased 9% to $85 billion
Additionally, despite an 80-basis-point expansion in gross margin, net income still declined 3% to $97 billion as operating costs continued to climb. However, earnings per share actually increased (less than a percentage point) because Apple plowed $77.6 billion into stock buybacks.
On the bright side, services revenue growth accelerated to 16% year over year in the fourth quarter, and Apple achieved record sales in several service categories, including App Store, AppleCare, iCloud, Apple Pay, and Apple TV+. That bodes well for the business because the services segment will likely be the primary growth driver going forward.
Apple stock quadrupled over the last five years, but shares look expensive
Apple is a wonderful business with a durable economic moat built on brand authority and proprietary technology, and those qualities afford the company a great deal of pricing power. To that end, Apple has been an extraordinary investment in the past. The stock soared 328% during the last five years.
However, I doubt shareholders will see anything close to that over the next five years. The stock traded at 15 times earnings five years ago, a much cheaper multiple than its current valuation of 31.3 times earnings. But the multiple itself is not necessarily important. What matters is how quickly Apple can grow its bottom line in the future, and Wall Street expects annual earnings growth of 10% on a per-share basis over the next three to five years.
That forecast makes its current valuation look quite expensive. So I plan to steer clear of Apple stock for the time being. But Buffett clearly has high conviction in the company, so I would not fault anyone for buying a small position in Apple stock today.
The last piece of advice I would offer is that readers should not allocate half of their portfolios to any single stock. Buffett is a highly skilled and highly accomplished stock picker, and his lead is almost always worth following. But diversification is important for the vast majority of retail investors because it reduces risk.
Editor's note: An earlier version of this story contained incorrect information about whether Berkshire ever sold Apple stock.
