Warren Buffett, the legendary investor and CEO of Berkshire Hathaway (BRK.A, BRK.B), is known for his long-term value investing strategy and his knack for picking winners. One of his favorite stocks is Apple (AAPL), the tech giant that dominates the smartphone market and has a loyal customer base. Buffett has been buying Apple shares since 2016, and now owns more than 1 billion shares worth over $200 billion. Apple is the largest holding in Berkshire’s portfolio, accounting for nearly half of its total value. But is Apple really the ultimate Warren Buffett stock, and should you buy it as well? Here are some pros and cons to consider before you make your decision.
The Pros of Buying Apple Stock
There are many reasons why Buffett loves Apple stock, and why you might want to follow his lead. Some of the main advantages of buying Apple shares are:
- Apple has a strong competitive advantage in the smartphone industry, thanks to its innovative products, loyal customers, and powerful brand. Apple’s iPhone accounts for more than half of its revenue, and has a loyal fan base that is willing to pay premium prices for its devices. Apple also has a thriving ecosystem of products and services, including the iPad, Mac, Apple Watch, AirPods, Apple TV, Apple Music, iCloud, and Apple Pay. These products and services create a network effect that increases customer loyalty and retention.
- Apple has a robust financial performance that reflects its competitive advantage. The company has consistently delivered revenue and earnings growth, even during the pandemic. In its fiscal 2023 third quarter, Apple reported revenue of $81.4 billion, up 36% year over year, and earnings per share of $1.30, up 100% year over year. The company also generated $21 billion in free cash flow in the quarter, and returned $29 billion to shareholders through dividends and share buybacks.
- Apple has a shareholder-friendly capital allocation policy that rewards investors with dividends and share buybacks. The company has increased its dividend every year since 2013, and currently pays a quarterly dividend of $0.22 per share, yielding 0.5%. The company also has a massive share repurchase program, which reduces the number of outstanding shares and boosts earnings per share. In April 2023, Apple announced a new $90 billion share buyback authorization, adding to its existing $50 billion program.
The Cons of Buying Apple Stock
Despite its many strengths, Apple stock also has some drawbacks that might make you think twice before buying it. Some of the main disadvantages of buying Apple shares are:
- Apple faces intense competition in the smartphone industry, especially from Android-based rivals like Samsung, Huawei, Xiaomi, and Oppo. These competitors offer cheaper alternatives to the iPhone, and often have faster innovation cycles and larger market shares in emerging markets. Apple also faces competition in other segments of its business, such as tablets, laptops, smartwatches, streaming services, and cloud computing.
- Apple is highly dependent on the iPhone for its revenue and profits, which makes it vulnerable to cyclical demand and product cycles. The iPhone segment accounted for 49% of Apple’s revenue in the third quarter of 2023, followed by the services segment at 21%, the Mac segment at 10%, the iPad segment at 9%, the wearables segment at 8%, and the other products segment at 3%. While the iPhone segment has been growing strongly in recent quarters, thanks to the launch of the iPhone 12 series with 5G capabilities, it could face headwinds in the future due to market saturation, supply chain disruptions, regulatory pressures, or consumer preferences.
- Apple is trading at a high valuation that reflects its strong performance and growth prospects, but also limits its upside potential and increases its downside risk. The stock currently trades at 32 times trailing 12-month earnings and 28 times forward earnings estimates, which are above its five-year average multiples of 22 and 19 respectively. The stock also trades at 8 times sales and 33 times free cash flow, which are above its five-year average multiples of 4 and 23 respectively.
The Bottom Line
Apple is undoubtedly one of the most successful companies in the world, and one of Warren Buffett’s favorite stocks. The company has a strong competitive advantage in the smartphone industry, a robust financial performance that generates ample cash flow, and a shareholder-friendly capital allocation policy that rewards investors with dividends and share buybacks.
However, Apple also faces some challenges that might limit its growth potential and increase its volatility. The company faces intense competition from Android-based rivals in the smartphone industry and other segments of its business. The company is highly dependent on the iPhone for its revenue and profits, which makes it vulnerable to cyclical demand and product cycles. The company is trading at a high valuation that reflects its strong performance and growth prospects but also limits its upside potential and increases its downside risk.
Therefore, while Apple is a great company and a great stock, it might not be the ultimate Warren Buffett stock, or the best stock for you to buy right now. You should weigh the pros and cons carefully before you make your decision, and consider other factors such as your risk tolerance, time horizon, and portfolio diversification.
