Warren Buffett has been evangelising about Apple (NASDAQ:AAPL) for some time. And with good reason – the company’s earnings per share have almost tripled since Buffett bought the stock in 2016.
Since the start of the year, though, the stock has fallen 8%. To me, though, this looks like an opportunity to buy shares in a high-quality company at a pretty attractive price.
Issues
Apple divides its business into two operations. The first is its products business, which is led by the iPhone, and the second is its services business.
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The two have quite different margin profiles. Despite accounting for less than 20% of the company’s revenues, its services division makes up around 30% of gross profits.
Investors should note, though, that the two can’t easily be treated in isolation. Revenues from the App Store and Apple Music increase with a great number of iPhones in circulation.
That’s why the recent challenges Apple has been facing are such a big deal. Initially, they might be a challenge to Apple’s product sales, but this has the potential to weigh on services as well.
How bad is the situation?
One of Apple’s most important advantages has been its ability to retain its customers. And the recent antitrust charges from the US and the EU are a particular challenge to this.
It’s worth noting, though, that customers don’t stay with the company just because switching costs are high. The business also has a very strong brand that is an important part of its attraction.
As Buffett points out, people would rather give up their second car than their iPhone – despite the car being significantly more expensive. That’s a testament to Apple’s brand power.
Lower switching costs would therefore be a challenge for the business. But it’s not obvious that they would be catastrophic.
AI
In general, the news hasn’t been positive for Apple recently. But there are some positive signs on the horizon and I think the emergence of artificial intelligence (AI) is one of them.
A lot of people have noted that the company has been quiet on its AI developments. And there are reports that it’s looking to integrate Alphabet’s products, rather than building out its own.
That doesn’t stop me seeing the emergence of artificial intelligence as a boost to the company, though. Even if Apple only features further along the value chain, there’s still a potential benefit.
I’m expecting hardware sales in general to benefit from AI integration. And given how important the iPhone is to Apple’s overall business, this could be a very positive thing for the company as a whole.
A buying opportunity?
Investing £10,000 in Apple right now would buy 70 shares, compared to 68 at the start of the year. And as Buffett says, the time to be greedy in the stock market is when others are fearful.
There’s a lot of pessimism around Apple shares at the moment. But this has been the case before and the company has always prevailed against its critics – I think it will do so again.
