Warren Buffett Apple’s notable investor and the CEO of Berkshire Hathaway, famously remarked, “Diversification serves as a safeguard against lack of knowledge. It makes very little sense for those who know what they are doing.’ In reality, he lives by this philosophy: Berkshire holds nearly half of its $363 billion stock portfolio in just one company.
For context, Buffett manages 90% of Berkshire’s portfolio, and according to Barron’s, significant deals or outright control are with Berkshire in companies like Warren Buffett Apple (AAPL -0.57%), Coca-Cola, Bank of America, American Express, and Chevron. In contrast, his investment managers Todd Combs and Ted Weschler handle the remaining 10% of the portfolio.
Warren Buffett Apple 48% Stake: Economic Moat Power
The top five companies, constituting an astonishing 75% of the $363 billion, are the ones Berkshire invested in, with Apple alone accounting for 48%. Buffett has never sold a single share of Apple since acquiring the first position in 2016. In fact, the company increased its position in the first quarter of 2023, and Buffett stated that he believes Warren Buffett Apple is the best business in which Berkshire is involved.
Apple possesses a stable economic moat built on brand authority and proprietary technology. Buffett believes that a stable economic moat is one of the most crucial features for a business, and it generally exerts power over determining values.
Warren Buffett Apple combines attractive hardware, proprietary software, and services, creating a unique user experience that fosters deep loyalty and brand authority. These qualities allow Apple to charge a premium for its products. On average, the iPhone sells 3.5 times more than Android smartphones owned by Alphabet.
Warren Buffett Apple: Electronics Lead, Services Drive Growth
The loyalty and brand authority of consumers have helped Apple establish a strong presence in various consumer electronics markets. Warren Buffett Apple is the largest smartphone manufacturer in the United States with a 55% market share and the second-largest globally with a 16% market share. It is the fourth-largest company globally in producing personal computers and leads in tablets and smartwatches. Overall, it indicates a potential increase in revenue in the hard-wear sector by 2030, especially with an anticipated annual 6.6% growth in the broader consumer electronics market during that period.
However, hardware products are only half of the equation. The other half is a services ecosystem that Apple utilizes to monetize its installed base, which currently exceeds 2 billion devices. These services include App Store sales, iCloud storage, Apple Pay, and subscription products like Apple TV and Apple Music.
Warren Buffett Apple’s services business is crucial, mainly because (1) it earns higher margins than the hardware business, and (2) the company has a strong presence in various related markets. For example, Apple’s App Store earns almost double the revenue of Alphabet’s Google Play Store, and Apple Pay dominates mobile wallet usage among U.S. consumers.
I believe that Warren Buffett Apple can achieve an increase in annual earnings per share until the end of this decade, provided the company continues to draw consumers into its services ecosystem.
Apple’s 2023: Revenue Falls, Services Up, Stock Buyback
Apple’s full-year financial performance has left much to be desired. Warren Buffett Apple reported incomplete financial results for the fiscal year 2023 (ending September 30) due to challenging economic conditions weighing on consumer spending. Total revenue decreased by 3%, reaching $383 billion, primarily due to a reduction in device categories. The offsetting increase in service revenue from the ordinary offset, as detailed below:
- iPhone sales decreased by 2%, amounting to $201 billion.
- Mac sales decreased by 27%, resulting in $29 billion.
- iPad sales decreased by 3%, reaching $28 billion.
- Wearables, Home, and Accessories sales decreased by 3%, maintaining $40 billion.
- Service sales increased by 9%, reaching $85 billion.
Furthermore, despite an 80-basis-point expansion in the overall margin, net income decreased by 3%, amounting to $97 billion, as operating expenses continued to rise steadily. However, per-share earnings actually increased (albeit by less than 1%) because Warren Buffett Apple repurchased $77.6 billion in stock.
On a brighter note, service revenue experienced a year-over-year increase of 16% in the fourth quarter, and Apple set record sales in several service categories, including the App Store, AppleCare, iCloud, Apple Pay, and Apple TV+. This business is positive because the services category will be a primary driver for potential growth in the future.
Warren Buffett Apple’s Stock Surge and Caution on Expensive Valuations
Warren Buffett Apple’s stock has surged fourfold in the last five years, but the shares appear expensive. Apple is an excellent business built on brand authority and proprietary technology, and these attributes provide the company with significant pricing power. For this reason, Apple has been an extraordinary investment in the past. Over the last five years, the stock has increased by 328%, and in the last five years, Warren Buffett Apple traded at 15 times earnings, which is very cheap compared to its current 31.3 times earnings.
However, I doubt that investors will see similar gains in the next five years. The stock traded at 15 times earnings five years ago when it produced 15 times less per share. Still, it is not crucial for many essential reasons. The important thing is how quickly Warren Buffett Apple can increase its bottom line in the coming years, and Wall Street expects annual earnings to grow by 10% based on a per-share basis for the next three to five years.
The current prediction makes its existing value quite expensive. Therefore, for now, I intend to divest my Apple stock. Still, Buffett is very confident in the company, so I won’t hold anyone accountable for buying a small position in Warren Buffett Apple today.
Finally, the advice I would offer is not to allocate half of your portfolio to any one stock. Buffett is an extremely skilled and successful stock picker, and his leadership is almost always worth emulating. But diversification is important for most investors because it reduces risk.
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Conclusion
A significant stake in Warren Buffett Apple has seen remarkable success, driven by consumer electronics dominance and a robust services ecosystem. Despite recent financial challenges and concerns over stock valuations, the resilience of Apple’s services sector offers optimism for future growth. While Buffett remains confident, individual investors are cautioned to diversify and make informed decisions in the ever-evolving market landscape.
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