Warren Buffett claims to not know much about technology. But the Berkshire Hathaway CEO’s investment in Apple (NASDAQ:AAPL) has been outstanding.
A £10,000 investment in Apple shares five years ago would have a market value of over £43,000 today. And to me, the company looks like it’s going from strength to strength.
Investment returns
Since 2019, Apple has paid out $5 per share in dividends and the stock has gone from $51 to $220. That’s a 331% increase – which is a great result – but investors should be careful.
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Earnings growth only accounts for around 116% of the share price increase. The rest is due to the stock trading at a much higher price-to-earnings (P/E) ratio than it did five years ago.
Back in 2019, Apple shares traded at a P/E ratio of 17. The current share price implies a P/E multiple of 34, which explains why the share price is up so much.
This is probably the biggest risk with the stock. There probably isn’t much more room for multiple expansion, in my opinion, so future returns are going to have to come from earnings growth.
Artificial intelligence
Fortunately, I think the company still has a lot of scope to grow its earnings going forward. And its role in the rise of artificial intelligence (AI) demonstrates this perfectly.
Apple hasn’t really invested in building its own AI products. Instead, it has announced a deal to partner with OpenAI, which Microsoft spent $10bn to acquire.
Integrating AI into its products should help boost iPhone sales. And the company also stands to benefit from users signing up for paid ChatGPT subscriptions through its App Store.
The most important thing, though, is that Apple is reportedly paying OpenAI nothing for the right to use its products. And it’s also said to be working on similar arrangements with ChatGPT’s rivals.
Competitive strength
Apple’s biggest strength is arguably the iPhone’s competitive position. This is why the company gets away with letting everyone else do the expensive investing and using their products for free.
Search is another example. Google dominates this industry and enjoys near-monopolistic power, but Alphabet still pays $20bn per year to have it as the default search engine on the iPhone.
The likes of Microsoft and Alphabet want their products in front of the most people. Whether they like it or not, that means going through the iOS ecosystem.
AI is shaping up to be a similar story, which highlights the power of Apple’s business. It allows the company to benefit from the developments without the heavy investment.
A stock to buy?
At a P/E ratio of 34, there’s no question Apple shares today are less good value than they were five years ago. As a result, I wouldn’t expect another 331% increase between now and 2029.
The company’s core strength is still intact, though. The iPhone’s dominance allows Apple to benefit from the development of AI without having to invest heavily up front.
I think the stock could still turn out to be a very good investment for a long time to come. It’s not at the top of my list of shares to buy, but I do think it has a bright future.
