Why Apple Stock Deserves a Prominent Place in Your Portfolio

2023年6月6日

Apple occupies a significant position in Berkshire Hathaway's investment portfolio, with an astounding value of $165 billion, making up 48% of the allocation as of March 31. Warren Buffett, the highly regarded investor known as the Oracle of Omaha, has expressed his belief that Apple stands apart from Berkshire Hathaway's other businesses. This positive sentiment aligns with Buffett's typical investment criteria, as Apple possesses many of the qualities he looks for in a company.

Drawing inspiration from one of the greatest minds in the stock market, investors can greatly enhance their portfolios. Here are three compelling reasons why considering an investment in Apple stock is worthwhile, despite its 39% increase in value this year.

While the iPhone continues to be a major contributor to Apple's revenue in the fiscal 2023 second quarter, accounting for 54% of it, the company has been actively expanding its services line in recent years. This segment has displayed impressive growth, with revenue reaching $13.3 billion in Q2 2020 and surging to $20.9 billion in the most recent fiscal quarter. Notably, the services segment is growing at a faster rate compared to Apple's products segment.

This shift towards services brings significant financial benefits for Apple. Services enjoy an impressive gross margin of 71%, surpassing the 37% gross margin associated with products. As services contribute a larger share of the company's revenue, they are poised to positively impact Apple's overall profitability.

Beyond the financial advantage, Apple's services segment plays a crucial role in fostering stronger customer loyalty. The renowned Apple ecosystem, which seamlessly integrates the company's hardware and software offerings, enhances the overall user experience. With over 2 billion active Apple devices worldwide, owners of these products have fewer reasons to switch to competing platforms. Apple's services, such as Music, Pay, and TV+, contribute to this loyalty by providing additional value and keeping users engaged within the Apple ecosystem.

Warren Buffett has often emphasized the significance of pricing power as an indicator of an exceptional company. According to him, a truly outstanding business can consistently raise prices with minimal impact on demand, without the need for extensive deliberation. Apple, holding a significant position in Berkshire Hathaway's portfolio, demonstrates an impressive ability to command pricing power, making it an attractive investment.

Apple's flagship product, the iPhone, has seen price increases since its initial launch in 2007. Remarkably, consumers continue to willingly pay higher prices for the latest versions without hesitation. This exemplifies the strong demand and brand loyalty associated with Apple's products.

Furthermore, even Apple's services have experienced price hikes, further reinforcing the company's pricing power. Through a combination of beautifully designed hardware products and its own user-friendly software ecosystem, Apple has established a differentiated offering, allowing it to maintain and strengthen its pricing power.

The ability of Apple to consistently raise prices across its product and service lines without significant repercussions on consumer demand is a testament to the company's enduring appeal and exceptional business model. It is one of the key reasons why Berkshire Hathaway maintains a sizable stake in Apple.

In a period characterized by heightened economic uncertainty, where concerns over inflation, rising interest rates, and the possibility of a recession loom large, it becomes prudent for investors to prioritize financially stable companies. Apple is a prime example of such a company.

Over the years, Apple has demonstrated impressive financial strength and stability. The company's gross margin has expanded from 38.5% in fiscal 2017 to 43.3% in fiscal 2022, while its operating margin has risen from 26.8% to 30.3% over the same period. This growth in profitability is a remarkable trait, showcasing Apple's ability to become more profitable as it continues to grow. This success can be attributed not only to its pricing power but also to the benefits of economies of scale. Apple has optimized expenses and leveraged fixed costs more effectively, which is particularly noteworthy in the consumer hardware industry where financial challenges are common. Yet, Apple has emerged as a thriving outlier.

Additionally, Apple generates substantial amounts of free cash flow, reaching an impressive $111 billion in fiscal 2022. The company is proactive in returning capital to shareholders, as evidenced by its stock repurchases amounting to $39 billion in the past six months. Moreover, Apple offers a dividend that currently yields 0.5%, further enhancing its appeal for income-oriented investors.

Considering these compelling factors, the arguments in favor of owning Apple stock are exceptionally strong. The company's solid financial performance and stability suggest that it has the potential to be a reliable and enduring presence in investment portfolios for years to come. By following the lead of successful investors like Warren Buffett and recognizing the enduring appeal of Apple's products, services, pricing power, and financial stability, investors can make informed decisions that can enhance their portfolios in the long run.

2023年6月19日

交易开始

In August 2018, Apple made history as the first publicly traded US company to achieve a market capitalization of $1 trillion. The company continued its impressive growth, surpassing $2 trillion in August 2020, and reaching an unprecedented $3 trillion market cap in January 2022.

Currently, Apple's market capitalization remains close to the $3 trillion mark. The question arises whether the company can maintain its biennial pattern and reach a market cap of $4 trillion by 2024. To assess this projection's feasibility, let's examine Apple's historical growth, projected growth rates, and valuations.

From 2017 to 2022, Apple demonstrated significant growth. Its annual revenue had a compound annual growth rate (CAGR) of 11.5%, while its split-adjusted earnings per share (EPS) had an even higher CAGR of 21.6%.

In simpler terms, Apple's annual EPS nearly tripled from fiscal 2017 to fiscal 2022, leading to the stock price nearly quadrupling over the past five years. However, it's important to note that Apple's valuations have risen faster than its actual profits. At the end of fiscal 2017, Apple's stock traded at $154.12 ($38.53 on a split-adjusted basis), equivalent to only 13 times the diluted EPS of $11.91 projected for fiscal 2018. Currently, Apple trades at 28 times forward earnings.

Apple's journey from $1 trillion to $3 trillion was driven by EPS growth and increasing valuations. Earnings growth resulted from strong sales of iPhones (still accounting for over half of its revenue), iPads, Macs, and expanding services through new subscription-based offerings. Simultaneously, Apple's valuations surged as more investors saw it as a safe-haven investment during times of market uncertainty, such as the pandemic, the Russo-Ukrainian war, inflation concerns, and rising interest rates.

It's worth noting that Apple's EPS typically grows faster than its net income due to regular share buybacks. Over the past five years, Apple repurchased around 19% of its shares and a remarkable 38% over the past decade.

Achieving a $4 trillion market cap for Apple by the end of 2024 would require a nearly 40% increase in its stock price over the next 18 months. However, two factors make this goal challenging.

Firstly, analysts expect a 2% decline in Apple's EPS for fiscal 2023, followed by a 9% rise in fiscal 2024, and an additional 10% growth to $7.17 per share in fiscal 2025. Assuming Apple continues to trade at 28 times forward earnings by the beginning of fiscal 2025, its stock would only experience a modest 9% increase, reaching approximately $200, resulting in a market cap just below $3.2 trillion.

Secondly, Apple's valuations are historically high, raising the possibility of a market downturn reducing its forward multiple to 20. In such a scenario, Apple's stock could decline to the mid-140s, resulting in a market cap of around $2.2 trillion.

Considering these factors and relying on analysts' estimates, it seems unlikely that Apple will reach a $4 trillion valuation by the end of 2024. However, it's important to note that these forecasts don't account for potential unforeseen events that Apple may leverage to its advantage.

One such factor is Apple's upcoming release of the Vision Pro headset in early 2024, marking a significant hardware launch since the introduction of the Apple Watch in 2015. A stronger-than-expected launch could lead to positive revisions in revenue and earnings estimates by analysts. Additionally, Apple concluded its latest quarter with 975 million paid subscriptions across its various services, representing an 18% growth compared to the previous year. This substantial user base provides ample opportunity for Apple to introduce new apps and services, potentially boosting its revenue and profitability.

Furthermore, Apple still holds a significant amount of cash and marketable securities, totaling $166 billion. This financial strength enables the company to pursue strategic investments and acquisitions. For instance, Apple could consider acquiring media companies to strengthen its services ecosystem or partnering with chipmakers to develop its first-party chips, enhancing its competitive advantage in the market.

Considering the uncertainties outlined earlier and the potential opportunities discussed, Apple's ability to achieve a $4 trillion market cap by the end of 2024 remains uncertain. It would depend on a range of strategic moves, successful product launches, and unforeseen developments.

While it is unlikely that Apple will reach the $4 trillion milestone by 2024, investors should focus on the company's enduring strengths. Apple's consistent ability to generate stable growth, its loyal customer base, and the stickiness of its services contribute to its long-term success. Additionally, Apple's commitment to rewarding investors through buybacks and dividends adds to its appeal as a long-term investment opportunity.

Investors should prioritize evaluating the intrinsic value and long-term prospects of Apple rather than being fixated solely on its market worth. The company's solid track record, strong fundamentals, and ongoing innovations make it a compelling choice for those seeking stability and growth over an extended period, irrespective of its precise market valuation.