Some companies need no introduction – and I would say Apple (NASDAQ: AAPL) is one of them. The tech giant is a daily part of lives around the world, driving huge profits for the business. So far this year, Apple stock has already jumped 18%.
But on a one-year timeframe, the share price has actually fallen 10%.
Apple has spent more buying back its own shares in the past decade than any other company. As major shareholder Warren Buffett has pointed out, that means the company’s earnings per share are higher even if profits do not rise.
This year’s rally suggests that Apple stock still has a lot of fans. Ought I to join them and buy some for my portfolio?
Apple is a great business
Like Buffett, when thinking of shares I could buy for my portfolio, I am trying to find great businesses at an attractive valuation.
From a commercial perspective, I definitely think Apple is a great business. Last year its revenues were $394bn. In other words, in one year alone, its sales were the equivalent of around $50 for every single man, woman and child on the planet. That is an incredible level of sales for what is essentially a consumer electronics company.
Even better in my view, earnings came in at $100bn. That is a huge number on its own. But it also means Apple achieved a net profit margin of 25% last year. That is impressive.
Can the company keep printing money in future? Lower-cost competition is a threat to sales and profits. A recession in many markets could also dampen sales. Indeed, sales and income slipped in the final three months of last year.
But the business offers a unique range of products. Its ecosystem of services ties users in, giving the firm tremendous pricing power. I also expect its finance arm to drive future earnings growth. Services revenue grew in the last three months of 2022. I see substantial scope for that growth to continue, as more shoppers opt to use digital payment methods such as Apple Pay.
Is the stock a bargain?
Clearly, I would be happy to own Apple stock in my portfolio – if I could buy it at the right price.
Onto the second part of Buffett’s approach then — is the current share price attractive?
I do not think so. Apple trades on a price-to-earnings (P/E) ratio of 25. If the latest quarterly earnings trend continues, the prospective P/E ratio is actually higher. Given a weak economy in many countries, I see further earnings deterioration as a distinct possibility.
The company has a lot going for it, but I may not benefit as an investor if I overpay. It had a lot going for it a year ago – but if I had bought then I would be sitting on a paper loss. Apple stock has got cheaper in that period. But I also think certain risks have grown, as shown by the recent earnings decline.
I do not think buying into Apple at the current share price offers good enough value for it to merit a place in my portfolio. So I will wait and see if this great business gets cheaper in future rather than buying now.
