Berkshire Hathaway (BRK.A -0.58%) (BRK.B -0.46%) CEO Warren Buffett once said: “Diversification is protection against ignorance. It doesn’t make much sense if you know what you’re doing.” In fact, he lives by this philosophy: Berkshire holds almost half of its $363 billion stock portfolio in a single company.
For comparison: Buffett manages 90% of Berkshire’s portfolio and large positions such as Apple (AAPL 2.11%), Coke, Bank of America, American ExpressAnd Chevron are either wholly or predominantly under its control, according to Barron’s. His co-investment managers Todd Combs and Ted Weschler now take care of the remaining 10% of the portfolio.
The five companies listed above account for a staggering 75% of the $363 billion Berkshire has invested in stocks, and Apple alone accounts for 48%. That screams great conviction. In fact, Berkshire has never sold a single Apple share since its initial investment in 2016. In fact, the company only added to the position in the first quarter of 2023, and Buffett said he believes Apple is the best company Berkshire is involved in.
Is it worth buying Apple shares?
Apple has a durable economic defense built on brand authority and proprietary technology
Warren Buffett believes that a durable economic moat is one of the most important characteristics a company can possess, and moats generally boil down to pricing power. Apple has this in abundance. Its ability to combine attractive hardware, proprietary software and services creates a unique user experience that has led to deep customer loyalty and brand authority.
These features allow Apple to charge a premium for its products. The average iPhone sells for 3.5 times the average price alphabet-own Android smartphone. Customer loyalty and brand authority have also helped Apple gain a strong presence in several consumer electronics markets.
Apple is the largest smartphone manufacturer in the United States (55% market share) and the second largest smartphone manufacturer worldwide (16% market share). It is also the fourth-largest PC maker in the world and a leader in tablets and smartwatches. Overall, this suggests mid-single-digit hardware sales growth through 2030, simply because the broader consumer electronics market is expected to grow 6.6% per year over that period.
However, these products are only the first half of the equation. The second half is the services ecosystem that Apple uses to monetize its installed base, which currently includes more than 2 billion devices. These services include, but are not limited to, App Store sales, iCloud storage, Apple Pay, and subscription products such as Apple TV+ and Apple Music.
Apple’s services business is particularly attractive because (1) it generates higher margins than its hardware business and (2) the company has a strong presence in several relevant markets. For example, the Apple App Store makes twice as much money as Alphabet’s Google Play Store, and Apple Pay is the most popular in-store mobile wallet among U.S. consumers.
Ultimately, I think Apple could achieve high-single-digit annual revenue growth by the end of the decade, assuming the company continues to attract consumers into its services ecosystem.
Apple’s full-year financial performance left much to be desired
Apple reported weak financial results for fiscal 2023 (ended September 30) as difficult economic conditions weighed on consumer spending. Total revenue fell 3% to $383 billion due to declines every Equipment category, offset by a slight increase in services revenue, as described below:
- iPhone sales fell 2% to $201 billion
- Mac sales fell 27% to $29 billion
- iPad sales fell 3% to $28 billion
- Wearables, home and accessories sales fell 3% to $40 billion
- Services revenue rose 9% to $85 billion
Additionally, despite an 80 basis point increase in gross margin, net income still fell 3% to $97 billion as operating costs continued to rise. However, earnings per share actually increased (by less than a percentage point) because Apple invested $77.6 billion in stock buybacks.
On the positive side, service revenue growth accelerated to 16% year-over-year in the fourth quarter, and Apple achieved record revenue across several service categories, including App Store, AppleCare, iCloud, Apple Pay and Apple TV+. This bodes well for the company as the services segment is likely to be the key growth driver in the future.
Apple stock has quadrupled in the last five years, but shares look expensive
Apple is a wonderful company with a durable economic edge based on brand authority and proprietary technology, and these qualities give the company great pricing power. In this regard, Apple has historically been an exceptional investment. The stock is up 328% in the last five years.
However, I doubt shareholders will see anything similar in the next five years. The stock traded at 15 times earnings five years ago, a much cheaper Multiple of its current valuation of 31.3 times earnings. But the multiple itself is not necessarily important. What matters is how quickly Apple can grow its bottom line going forward, and Wall Street expects 10% annual earnings per share growth over the next three to five years.
This forecast makes the current valuation seem quite expensive. Therefore, I plan to stay away from Apple shares for now. But Buffett clearly believes in the company, so I wouldn’t begrudge anyone buying a small position in Apple stock today.
The last piece of advice I would like to give is that readers should not Allocate half of your portfolio to a single stock. Buffett is a highly skilled and accomplished stock picker, and it’s almost always worth following his example. However, for the vast majority of retail investors, diversification is important because it reduces risk.
American Express is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Apple, Bank of America and Berkshire Hathaway. The Motley Fool recommends Chevron and recommends the following options: Long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.