Since 1965, Berkshire Hathaway has compounded shareholder capital at a nearly 20% annualized rate. That unbelievable performance was under the stewardship of Warren Buffett, arguably the best investor ever.
The Oracle of Omaha's most lucrative idea might have happened in the past decade, though. Shares of this consumer-facing enterprise have soared 749% in the last nine years (as of July 15), producing a huge dollar gain for Berkshire. Despite numerous stock sales over a four-quarter stretch from the fourth quarter of 2023 through the third quarter of 2024, this company still represents 22% of the conglomerate's $290 billion portfolio, making it the biggest position.
This is a wonderful business, but should investors buy the stock?
Image source: The Motley Fool.
Passing Buffett's filter is a valuable endorsement
During the first quarter of 2016, Buffett and Berkshire initiated a position in Apple (AAPL 0.46%). Based on the percentage return mentioned above, this turned out to be an investing masterstroke. Looking back at the decision, investors can gain valuable insights as to how Apple passed Buffett's filter.
Berkshire's portfolio is full of businesses that possess strong brands. There might be none more powerful than Apple, which has a global customer base that's loyal to the company's products and services, constantly waiting for what will be launched next. Apple positions itself at the premium end of the consumer electronics industry, but its intense focus on innovation has won over consumers.
This also allows for pricing power, a trait that Buffett loves. Apple's share of the smartphone industry's profits is significantly higher than its share of unit sales, which reveals the financial success of the iPhone.
Buffett likes to own companies in pristine financial shape. Apple generates copious amounts of free cash flow each quarter. And in the past five years, the operating margin has averaged a breathtaking 30%.
Of course, a great company doesn't always make for a worthwhile investment opportunity. Here's where valuation comes into focus. During the first quarter of 2016, Apple shares traded at an average price-to-earnings (P/E) ratio of 10.6. Viewing this multiple with the company's brand, pricing power, and profits, buying Apple more than nine years ago looks like a no-brainer decision for Buffett with the benefit of hindsight.
Is Apple stock a buy now?
As of March 31, Berkshire Hathaway owned 300 million Apple shares. If Buffett and his team weren't still bullish on Apple, then they wouldn't have such a huge position in the stock. But should individual investors buy shares now?
To come to an informed answer requires a fresh perspective. Some of the favorable traits still hold true, like the powerful brand and the monster profits.
However, there's reason to believe that this "Magnificent Seven" stock will struggle to outperform the market over the next five or 10 years. Apple's growth is nothing to write home about. The analyst community sees revenue increasing at a compound annual rate of 5.3% between fiscal 2024 and fiscal 2027.
Apple's lack of progress with artificial intelligence (AI) initiatives also continues to receive criticism. Updates to the Siri voice assistant that integrate AI aren't coming until next year. And Apple has relied on partnerships to bring AI capabilities to its operating system. At the end of the day, these aren't driving meaningful growth.
Investors also certainly won't be pleased with the fact that the stock currently trades at a P/E ratio of 32.9. At a valuation three times what Buffett first paid, Apple stock isn't a buy right now.
