In the past 60 years, Berkshire Hathaway has compounded shareholder capital at an unbelievable 19.9% annualized rate. Thanks to Warren Buffett's direction of the conglomerate, he has become an investing legend whose moves are watched very closely by the average investor out there.
Maybe Berkshire's best investment decision came in the past decade, when it purchased a monster stock in early 2016 that is up 644% since the start of that year (as of May 23). Despite numerous sales in the past few quarters, this business still represents 21% of Berkshire's huge $276 billion portfolio.
Investors need to know what company this is. Perhaps it deserves a closer look for your own portfolio.
Image source: The Motley Fool.
Wonderful qualities that caught Buffett's attention
In a move unusual for Buffett, Berkshire allocated capital to a tech stock in the first quarter of 2016. The investment in Apple (AAPL -2.88%) ended up working out in remarkable fashion. The Oracle of Omaha understood first and foremost that Apple possessed one of the world's most powerful brands, a trait he had familiarity with.
Apple's innovative culture, intense focus on providing an exceptional user experience, and well-designed products and services support how strongly it resonates with consumers across the globe. This continues to have a positive impact on the brand image.
Keeping customers engaged and preventing them from leaving to rival products and services is something Apple excels at. It comes down to the rare combination of having hardware that's differentiated by its own software, which creates a robust ecosystem that keeps users locked in.
Positioning itself at the premium end of the consumer electronics market also helps. Apple has historically benefited from having unrivaled pricing power, a characteristic Buffett believes is a clear indicator of a high-quality enterprise.
That pricing power drives remarkable profitability for Apple. Buffett wants to own companies that are in pristine financial shape. In the past decade, Apple's net profit margin has averaged a superb 23%. This leads to the production of copious amounts of free cash flow, which the management team returns to shareholders in the form of dividends and stock buybacks.
And of course, we can't forget how much
0valuation matters to Buffett's decision-making process. During the first three months of 2016, the period Berkshire made its first purchase in Apple, the stock traded at an average price-to-earnings (P/E) ratio of 10.6. That was a fantastic deal.
Should you buy Apple stock right now?
It can provide investors with peace of mind knowing that the Oracle of Omaha owns a stock that you're interested in. However, I believe it's best to proceed with caution in this situation.
Apple is dealing with some issues these days that are hard to ignore. First, it remains in the crosshairs of the ongoing tariff situation. President Trump just threatened a 25% tariff on imported iPhones if the business doesn't move production to the U.S. This adds a lot of uncertainty as to how things will shake out.
What's more, Apple's growth has stalled, perhaps because consumers don't feel the need to upgrade to the newest devices as frequently. Revenue increased by just 2% in fiscal 2024. And according to Wall Street consensus estimates, sales will grow at an unimpressive compound annual rate of 5% between fiscal 2024 and fiscal 2027. This doesn't justify paying a P/E ratio of 30.5 for the stock, which is triple the valuation Buffett first paid.
There are also concerns that Apple is lagging competitors in artificial intelligence (AI). It doesn't help that Apple's former chief design officer, Jony Ive, just sold his company io to OpenAI for $6.5 billion. OpenAI will now start to develop hardware devices that embed AI at their core, introducing competitive pressure for Apple.
All of this is to say that investors can expect lower returns from Apple going forward than what was achieved in the past. Consequently, I don't view the stock as a smart buy today.
