40% of Warren Buffett's $379 Billion Portfolio Is Invested in Only 1 Stock
No one in the investing world is as closely watched as Warren Buffett. The Oracle of Omaha's fantastic track record allocating capital at Berkshire Hathaway has made him an investing legend whose portfolio holdings are considered potential buying opportunities for individuals.
One of Buffett's biggest wins in recent times is Apple (NASDAQ: AAPL). Berkshire first invested in the "Magnificent Seven" stock in the first quarter of 2016. And from the start of that year to May 21 of this year, shares have soared 631%. Apple now represents a jaw-dropping 40% of Berkshire's entire portfolio.
Continue reading to learn what factors probably caught Buffett's attention with this business. Then, investors can assess if the stock is a smart buy today.
Passing Buffett's test
Looking back, it's not too difficult to figure out why Buffett was drawn to Apple. While he's someone who typically stayed away from tech-focused enterprises, his thinking centered on the fact that Apple was a powerful consumer brand more than anything. This was the key to its success.
That brand has helped Apple flex its pricing power, a characteristic that Buffett believes makes a business great. Consumers seem to always be willing to pay up for the company's expensive hardware products, even if the newest updates aren't that revolutionary. Overall, the business carried a superb gross margin of 40% in fiscal 2015, the year before Buffett purchased shares.
Customer loyalty is another trait that can't be ignored. In Apple's case, the combination of well-designed products with easy-to-use software and services creates an ecosystem that essentially results in consumer lock-in.
Buffett is known for practicing patience as he waits for the so-called fat pitch. During the first quarter of 2016, Apple shares traded at an average price-to-earnings (P/E) ratio of 10.6, which, in hindsight, looks like an absolute steal. I think the market might have been worried that iPhone growth was stalling at the time, leading to a pressured valuation multiple.
However, like the independent thinker that he is, Buffett realized that Apple was still an incredibly profitable business. It posted a 30% operating margin in fiscal 2015 while generating $70 billion in free cash flow that year.
Even better, Apple was in pristine financial shape. As of Dec. 26, 2015, the company had $216 billion of cash, cash equivalents, and marketable securities on the books, compared to $56 billion in long-term debt.
Thanks to its so many wonderful traits, Apple was a no-brainer investment decision for Warren Buffett.
Is it too late to buy Apple stock?
As we look at Apple today from a fresh perspective, I think investors will come to a different conclusion. After years of strong share performance, this business sports a market cap of $2.9 trillion. And the stock isn't cheap by any means.
Right now, Apple trades at a P/E ratio of 29.7. This is way more expensive than its trailing-10-year average. While Berkshire is still a sizable shareholder, I doubt Buffett would buy the stock at the current valuation.
Given its massive scale, it's easy to argue that Apple has limited growth prospects, at least not remotely close to what it achieved in the past. The company has reported a year-over-year revenue drop in five of the past six fiscal quarters. Consensus analyst estimates believe sales will rise at an annualized clip of just 4.6% through fiscal 2026.
The iPhone was launched about 17 years ago, but it's still important, accounting for half the revenue in the latest fiscal quarter (Q1 2024, which ended March 30). As it's in a very mature stage of its lifecycle, it's hard to encourage consumers to continue upgrading to the newest devices. Unless Apple can introduce a game-changing new product that can move the financial needle, it's best to temper expectations.
Apple has turned out to be a huge winner for Berkshire. But investors should think twice before buying shares today.
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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.
