Source: PaxForex Premium Analytics Portal, Fundamental Insight
Apple holds a prominent position in Berkshire Hathaway's investment portfolio, representing a staggering $165 billion and constituting 48% of the allocation (as of March 31). Warren Buffett, the esteemed investor often referred to as the Oracle of Omaha, has expressed that Apple is distinct from the other businesses owned by Berkshire Hathaway. This positive sentiment aligns with Buffett's typical investment criteria, as Apple possesses many of the qualities he seeks in a company.
Taking cues from one of the greatest minds in the stock market, investors can significantly enhance their portfolios. Here are three compelling reasons why it is worth considering an investment in Apple stock, even with its 39% rise in value this year.
While the iPhone remains a significant contributor to Apple's fiscal 2023 second-quarter revenue, accounting for 54% of it, the company has been focusing on expanding its services line in recent years. This segment has shown 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 than Apple's products segment.
This shift toward services has notable financial benefits for Apple. Services enjoy a remarkable gross margin of 71%, surpassing the gross margin of 37% associated with products. As services generate a larger share of the company's revenue, it is poised to have a positive impact on Apple's overall profitability.
Beyond the financial advantage, Apple's services segment plays a crucial role in fostering greater customer loyalty. The renowned Apple ecosystem, which encompasses the seamless integration of 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, including 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 a remarkable company. According to him, a truly exceptional business can consistently raise prices with minimal impact on demand, without the need for extensive deliberation. Apple, which holds 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, as Apple optimizes expenses and leverages fixed costs more effectively. This is particularly noteworthy considering the financial challenges often associated with the consumer hardware industry, where 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, exemplified 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.
Given 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.
As long as the price is above 170.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 179.19
- Take Profit 1: 185.00
- Take Profit 2: 191.00
Alternative scenario:
If the 170.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 170.00
- Take Profit 1: 165.00
- Take Profit 2: 160.00
