News

Thanks to his unbelievable track record of compounding capital over many decades as the CEO of Berkshire Hathaway, Warren Buffett is probably the most closely watched investor out there. Everyone can learn a thing or two following his advice and actions.

One of Buffett's best bets has been to buy shares in Apple (NASDAQ: AAPL), the dominant consumer-electronics enterprise. Berkshire first purchased the stock in the first quarter of 2016, and since the start of that year, Apple has soared 862% (as of Dec. 17), meaningfully outperforming the S&P 500.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. See the 10 stocks »

As of this writing, 25% of Berkshire's massive $299 billion portfolio is in Apple, making it its top holding, even after the Oracle of Omaha trimmed the position over the past year. Continue reading to learn what first caught Buffett's attention and if the stock is a smart buy right now.

Favorable characteristics

Nearly a decade ago, just before Buffett and Berkshire first bought a stake in Apple, it was obvious that Apple possessed one of the world's most powerful brands. The company's successful history of developing and bringing to market extremely popular and in-demand hardware devices allowed it to resonate strongly with consumers. That positioning has helped the company flex its pricing power.

Besides Apple's brand, Buffett likely understood that the company had tremendous customer loyalty. Credit partly goes to the brand's image.

However, Apple's ecosystem, which mixes its hardware offerings with a suite of internally developed software and services to provide a superior user experience, essentially locks consumers in, discouraging them to change to competitors' offerings. Buffett even suggested that if you offered someone $10,000 on the condition that they could never use an iPhone again, the deal would be declined -- probably without hesitation. This points to Apple's customer loyalty.

Buffett appreciates businesses that are in sound financial shape, and perhaps no company is as financially fit as Apple. It generates incredible amounts of operating income and free cash flow quarter in and quarter out, allowing management to repurchase shares and pay dividends. As of Sept. 28, Apple had a net cash position of $50 billion, a financial cushion that lets investors sleep well at night.

During the first three months of 2016, Apple shares traded at a price-to-earnings ratio (P/E) of 10.6. With the benefit of hindsight, that valuation made the investment opportunity seem like a no-brainer. No wonder Buffett made the decision to buy Apple stock then.

Should you buy Apple stock?

After such a fantastic run in the past several years, Apple shares trade in record territory. The stock isn't cheap, compared to its past, selling at a P/E multiple of 41.7 right now. That represents a sizable 86% premium to its trailing-10-year average valuation, which makes the stock definitely expensive.

Paying this high of a P/E ratio isn't ideal, in my opinion. It indicates heightened expectations, enthusiasm, and optimism surrounding Apple, which leaves zero margin of safety for prospective investors.

Making matters worse is Apple's growth outlook. According to Wall Street consensus analyst estimates, the company's earnings per share are set to rise at a compound annual rate of 11.6% over the next three years. That forecast doesn't justify paying the high valuation.

Berkshire locked in some profits in 2024 before a potential hike in the capital gains tax rate. In addition to that, I'm guessing that valuation is the key reason Buffett and his team have trimmed the Apple position.

Investors who want to follow in Buffett's footsteps now and take a bite out of Apple stock should think twice. It's best to monitor the business and practice patience. Only consider buying when the P/E ratio gets closer to 25.

Should you invest $1,000 in Apple right now?

Before you buy stock in Apple, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $800,876!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of December 16, 2024

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.