Apple (NASDAQ: AAPL) might seem like a good buy from a certain point of view. The company recently released its Vision Pro goggles, arguably its most notable new product release in years.
However, the pride of Cupertino faces considerable headwinds that could limit growth in the near term. While investors should not give up on Apple stock, its prospects for beating the market over time have become increasingly uncertain.
The state of Apple stock today
First, investors need some perspective when it comes to Apple. With its array of popular products and services, as well as its $173 billion in liquidity, it has one of the most solid balance sheets in existence.
Additionally, it continues to benefit from the success of the iPhone, and even amid its struggles, iPhone sales rose 6% in its fiscal 2024 first quarter (which ended Dec. 30), making up 58% of Apple's revenue.
Nonetheless, one could forgive investors for not wanting to add Apple shares to their portfolios right now. Its sales in the Greater China market experienced a 13% yearly decline in the latest quarter. Overall, Apple's quarterly revenue grew by only 2% year over year to $120 billion.
Also, since the death of Steve Jobs in 2011, the company's development of obviously innovative products has slowed considerably. To Apple's credit, it released the Apple Watch in 2015 and experienced some success with its array of Apple Services offerings. Still, the pipeline of innovations has felt fairly dry in recent years.
Lately, it has developed the Apple Vision Pro, which it describes as the first "spatial computer," combining digital content with physical spaces. This virtual reality headset offers more functionality than the Meta Quest 3 VR goggles sold by Meta Platforms.
However, the Vision Pro costs more than three times as much as Meta's most advanced Quest model, the Meta Quest Pro, and it remains to be seen if customers will pay that kind of premium for Apple Vision Pro.
Apple and Berkshire Hathaway
Additionally, investors should ask if that current value proposition is worth paying 30 times earnings for the stock. This is well above its P/E ratio in the 2010s, when it rarely rose above 20. It was at that time that Warren Buffett's Berkshire Hathaway first began buying Apple shares.
When Berkshire started to invest in Apple, the stock traded at about 12 times earnings. Even as the P/E ratio rose to 18, the share purchases continued. Buffett sold some shares between 2018 and 2020 -- decisions he would later regret -- and subsequently resumed the share purchases.
AAPL PE Ratio data by YCharts.
However, Berkshire's last Apple purchase was in the first quarter of 2023, and with Apple making up nearly half of the value of Berkshire's stock portfolio (and the conglomerate holding almost 6% of Apple's outstanding shares), Berkshire could have a considerable incentive to reduce its Apple exposure. If Berkshire sells some Apple shares, other investors could follow, putting a cap on Apple's near-term share price growth.
Stand pat on Apple
All things considered, investors should stay on the sidelines with Apple for now. Admittedly, its massive cash hoard makes a sustained decline in the stock unlikely. The question is where it will go from here, as I see no certain path for significant growth. Moreover, with the stock trading at a 30 P/E ratio, it provides no obvious avenue for multiple expansion, a factor that's likely to limit its stock returns further. That could prompt Berkshire Hathaway to sell some of its shares, which in turn could negatively influence the stock.
Ultimately, Apple should remain a top consumer and technology holding, and longtime shareholders have good reason to maintain their Apple positions. Nonetheless, until the company offers a more obvious path to outsized growth, investors have little reason to buy more Apple stock.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Meta Platforms. The Motley Fool has a disclosure policy.
