At the weekend shareholders’ meeting of his company Berkshire Hathaway, legendary investor Warren Buffett had a lot to say about Apple (NASDAQ: AAPL). He said he was “very, very, very happy” owning around 5.6% of the tech giant. So as someone who does not own any Apple stock, ought I to follow Buffett and add some to my portfolio?
Individual circumstances
Not necessarily. Every investor has their own circumstances, resources and areas of competence. Although I have learnt a lot about investing by watching Buffett’s moves, just because he does something does not automatically mean it would be an appropriate move for my own portfolio.
However, some of the attractions he sees in Apple stock also appeal to me.
The company has an iconic brand. Its huge customer base includes many loyal fans who have invested time getting to understand the company’s services. That makes them less likely to switch to competitors. Apple’s increasing move into services, such as financing, dangles the prospect of vast, growing new revenue streams.
Buffett is so excited about Apple that at the meeting, he described it as “a better business than any we own.”
Is the stock a bargain?
Still, I see some risks in Apple’s business model as well as a lot of things to like.
In a tightening economy, the high cost of many Apple products could lead to sales falling. The strong profitability of Apple’s business continues to attract a lot of competitors. In the long term, that could hurt profit margins for the company.
Despite those risks though, I think the business model and competitive advantages enjoyed by Apple are powerful. Last year its net income was just under $100bn. I expect that continued growth in areas like financial services could see earnings grow in coming years.
However, with a price-to-earnings ratio of 29, I consider those prospects as already being factored into the price of Apple stock. At that valuation, I do not see the shares as a bargain.
In fact, they are more costly than I would be comfortable with. So I have no plans to buy at the moment.
How to build wealth
But five years ago, some investors already said Apple stock was overpriced. Yet it has more than tripled in value since then.
With the benefit of hindsight, I now know that investing back then would have been lucrative for me. But as an investor, I cannot predict what will definitely happen.
Apple is a strong business and I think it has a promising future. But Buffett did not earn billions of pounds merely by investing in strong businesses.
Rather, he did so by buying into such businesses when their shares were trading at an attractive valuation. Doing that, in my opinion, is one of the keys to building serious wealth. Valuation matters as well as business quality.
