Warren Buffett is known for seriously looking at the price tag when he buys a stock. The chairman of Berkshire Hathaway goes for players that are undervalued and holds onto them for the long term. Back in the first quarter of 2016, he added a top technology and consumer goods company to the portfolio -- and that stock has gone on to advance more than 600%.
I'm talking about Apple (AAPL 1.02%). If you haven't yet bought shares of the company, you might wonder if you missed out on an opportunity. But what if I told you that, considering the company's long-term potential, the shares still look cheap? That means this Warren Buffett stock holds plenty of potential to make you richer over time.
Apple's rising earnings over time
Apple, the company, may be just about as well known as the piece of fruit. The company sells the iconic iPhone and Mac, along with other devices that have become popular worldwide. These products have not only helped Apple increase earnings over time, but also helped with other key financial measures like free cash flow and return on invested capital.
AAPL Revenue (Annual) data by YCharts.
In the most recent quarter, Apple's earnings per share rose 16% to an all-time high of $2.18, and the company said services revenue also reached a record. It's no surprise services are booming because Apple's number of installed devices has increased to more than 2.2 billion -- its highest level ever. The more active devices out there, the more of an opportunity Apple has to sell services to users -- from cloud storage to digital content.
Apple faces certain challenges such as tougher competition in China from local rival Huawei and pressure from foreign exchange rates. Even the fact that Apple has been slower to offer details about its artificial intelligence (AI) plans than other tech players could weigh on the stock.
But overall, Apple has offered investors the perfect combination of growth and security, thanks to the earnings I've just described and the company's dividend payment. This isn't necessarily a given in the world of technology stocks.
Here's why all of this could continue and Apple stock should climb even higher over time. First, Apple's solid moat, or competitive advantage, is the company's brand strength, and this may keep it at the head of the pack. Apple users generally love the products so much they stick with them. In the quarter, Apple said the number of iPhone users upgrading reached an all-time high.
Apple wins over new users
In addition to this, Apple continues to win over new users. For example, in the quarter, almost two-thirds of Apple Watch buyers were new to that product. And about half of iPad and Mac buyers were new to those products.
Finally, Apple's work over the years to build up its number of device users now can bring in a whole new source of revenue -- from the services sold to them. As mentioned above, this revenue hit a record in the quarter, and that's after doing the same in previous quarters.
Services revenue clearly is on the rise. This is fantastic news because it means the purchase of an Apple device doesn't stop there. Instead, it translates into recurrent revenue for the company.
Now let's consider Apple's share price. The stock has climbed more than 20% over the past year, but despite the gains, the valuation remains reasonable. It trades for about 29x trailing-12-month earnings, more than double its valuation by that measure when Buffett first got in on the stock. But it's important to remember that revenue has climbed considerably since that time -- and as mentioned above, a record number of devices now are driving significant growth in services revenue.
AAPL PE Ratio data by YCharts.
The Apple of today isn't identical to the Apple of 2016. Today, growth prospects are even brighter, and that means the stock continues to look like a bargain for the long-term investor. That's why this Warren Buffett favorite could help make you richer over time, even if you're just buying the stock right now.
