There's no denying Warren Buffett's remarkable track record. As the CEO of Berkshire Hathaway, he has done an amazing job compounding capital at high rates over multiple decades. This is why the average investor closely watches what the Oracle of Omaha owns.
Berkshire's massive $369 billion portfolio has dozens of stocks. But Apple(NASDAQ: AAPL), which represents 41.4% of the overall portfolio, stands out as the single largest holding. The FAANG stock has soared 542% since the start of 2016 (as of April 2), which is around the time Buffett first started buying the business.
Before investors contemplate whether it's a good idea to scoop up shares today, it's important to understand the factors that first drew Buffett to Apple.
Apple's wonderful qualities
Even in early 2016, Apple had one of the world's strongest brands, boosted by its lineup of incredibly popular hardware products. This gave the company pricing power. Consumers want to continue paying up for new devices.
Buffett appreciates businesses that can consistently ask their customers to pay more without hurting demand. Another top Berkshire holding is Coca-Cola, which certainly fits this category.
Apple is a financial powerhouse. In fiscal 2015, the business posted an operating margin of 30%. And it generated $70 billion of free cash flow (FCF) that year.
This type of profitability continues today. Apple produced $100 billion of FCF in fiscal 2023. Management used this windfall to pay $15 billion in dividends and to repurchase $83 billion worth of outstanding stock.
In addition to strong financial performance, valuation is another top factor that Buffett looks at. During the first three months of 2016, Apple shares traded at an average price-to-earnings (P/E) ratio of 10.6. Given some of the sky-high valuations in the market today, this was an absolute steal for such a dominant company. Buffett took full advantage of the buying opportunity.
Should you buy Apple stock right now?
While Apple has obviously worked out as a tremendous investment for Berkshire and Buffett, investors shouldn't just automatically buy the stock right now. I think it's best to view the current situation with a fresh perspective.
If investors can agree on one thing today, it's that Apple is no longer the screaming bargain that it was about eight years ago when Buffett first bought shares. In my opinion, this is an expensive stock right now, which makes sense given its impressive performance over the years.
Apple shares trade at a current P/E ratio of 26.3. To be fair, this has come down from the 32.3 it was less than four months ago. But it's still pricey.
That's because Apple certainly doesn't have the same growth potential that it did several years ago. This is a far more mature enterprise today.
In fact, the business saw its sales decline slightly in fiscal 2023. And over the next three years, Wall Street analysts expect revenue and earnings per share to rise at annualized clips of 4.4% and 8.3%, respectively. Paying such a high valuation multiple doesn't seem like a smart move considering these weak forecasts.
We can't read his mind. However, I suspect Buffett still owns the stock because he doesn't want to trigger a taxable event. Or maybe he simply wouldn't know what to do with all the cash, a problem that Berkshire has already been dealing with.
Apple has been a huge winner historically. But based on where things stand today, it's best to pass on the stock.
Should you invest $1,000 in Apple right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
