Few would dispute that Warren Buffett is one of the greatest investors of all time. Since 1965, his conglomerate, Berkshire Hathaway (BRK.A 1.07%) (BRK.B 1.11%), has generated a 20.1% compound annual rate of return versus a 10.3% return for the S&P 500. Barron’s recently noted that Berkshire Hathaway could lose 99% of its current value and still have outperformed the broad market index over that span.
Buffett has said you don’t have to understand arcane investment formulas and modern portfolio theory to be successful in buying stocks. In fact, he says you’re probably better off not knowing about any of that.
“Your goal as an investor,” Buffett wrote in one of his annual shareholder letters many years ago, “should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now.”
Simply put, buy good companies at reasonable prices and hold onto them for decades. That philosophy helps explain why Buffett loves Apple (AAPL 0.11%) so much.
Bigger than you think
Apple is now Berkshire Hathaway’s largest stock holding. The conglomerate began accumulating its shares in 2016. The position — now worth about $138 billion — accounts for around 41% of the value of Berkshire’s stock portfolio.
Moreover, many investors aren’t aware that Buffett has a hidden portfolio where Apple represents an even larger percentage of the total. As my colleague, Sean Williams, recently detailed, Berkshire Hathaway owns a specialized investment services firm through the General Re insurance company. This New England Asset Management business has over $6.3 billion in assets under management.
Of that total, Apple represents some 56.5% of the portfolio, and though the subsidiary has its own asset management team, Berkshire Hathaway is still the ultimate owner.
A leader in every respect
There are several things that Buffett likely finds attractive about the tech giant and that feed his belief it will be able to deliver for years and years to come.
First is Apple’s iconic brand. Tens of millions of people willingly pay a premium for its products, and so they can be connected to the Apple ecosystem, where all the products and services work with one another.
Second, Apple has been an innovation leader, first with computers, then with digital music players, and then with the iPhone — arguably its greatest product of all. First introduced in 2007, it has become the most popular mobile phone on the market. Among premium smartphones costing more than $400, the iPhone has a whopping 62% market share globally.
As the next generation of 5G iPhones rolls out, look for its dominance to grow as fast speeds and greater connectivity improve telecommunications. Apple has also released its latest MacBook Pro laptop and is refreshing the entry-level iPad with a USB-C port.
The next phase of Apple’s growth, though, could be driven by its services business. That segment’s revenue hit a record $19.8 billion in its fiscal 2022 Q2 and now accounts for over 20% of total sales. Margins for the services business also continued to expand, growing to 72.6% compared to 70.1% in the prior-year period.
Earnings growth for years to come
Wall Street analysts’ consensus forecast is for Apple’s revenues to grow from $393 billion in 2022 to $506 billion four years from now, with earnings per share widening to $8.63 from $6.14, or 10% growth annually. For a company with a $2.5 trillion valuation, that’s no small feat.
While Apple stock is not cheap by traditional measures, trading for 25 times trailing earnings, 23 times next year’s estimates, and 27 times free cash flow, it’s not expensive either, and its premier market position warrants paying up a little for the stock.
Apple also pays a modest dividend that at the current share price yields 0.6% annually. Still, given the company’s massive hoard of $51 billion in cash, equivalents, and short-term investments, it has the wherewithal to support and raise the payout over time if management chooses to do so.
It’s easy to see why Buffett loves Apple — and you just might want to cozy up to the tech stock, too.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.