Warren Buffett is a legendary investor and a lot of his moves make perfect sense. What about his position on Apple (NASDAQ: AAPL), though? The Apple share price has moved up a quarter over the past year (and more than tripled over five years).
Buffett’s offloaded billions of pounds’ worth of Apple shares in recent years – but he’s also hung onto billions of pounds’ worth.
If he reckons Apple’s overvalued, why hasn’t he sold the lot? If he thinks the price is good enough to justify Apple still being his largest holding, why sell any at all?
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I don’t know, frankly: only Buffett does. Maybe it’s for tax reasons. Maybe Buffett just wants to keep his portfolio diversified after the Apple share price soared.
But while I can’t read the Sage of Omaha’s mind, the soaring cost of the tech company’s stock has got me scratching my head.
Apple may be close to a perfect business
In some ways, Apple has a lot of the elements one would look for in a brilliant investment.
That’s why I’ve held it in the past and would gladly own the shares again if I could buy them at an attractive price. After all, a brilliant investment requires (to paraphrase Buffett) buying into a great company at an attractive price.
The firm’s area of operations is extensive. Sure, it sells phones and computers, tablets and watches. But it also makes a lot of money selling services. It has a booming financial services operation too.
Thanks to a strong brand, installed user base, proprietary technology, and the hassle involved with switching to rivals, Apple has serious pricing power.
Last year, it reported a net income of $94bn. Not only is that a huge sum, but it equates to a net profit margin of 24%. That’s what pricing power can do!
Here’s why I’m not buying now
Those wonderful economics help explain why the Apple share price has soared over the past five years (and beyond: its performance has been excellent over several decades).
But it also means I need to ask, as someone who’d be happy to own Apple shares: is the price I’d need to pay for them today a sensible one?
After all, as an investor, I aim to buy shares for less (ideally much less) than I think they’ll ultimately turn out to be worth.
But Apple, with its $3.2trn market capitalisation, now has a share price-to-earnings ratio of 34.
For me, that’s too high to justify, so I have no plans to buy Apple again at the current price.
Buffett talks about an investor having a “margin of safety” and I don’t see that in the current price. After all, the company faces growing competition from low-cost rivals.
I am also not convinced that the money it’s been pouring into its streaming business is likely to produce anything like the return on capital it’s achieved in other parts of its sprawling empire.
