Mr. Buffett recently extolled the powerful economic moat of one of the world’s most iconic companies: Apple. Berkshire spent a bit over $30bn to acquire their Apple stake, which now sits at 936 million shares. The relentless rise in the share price puts Berkshire’s Apple position at $160bn today, their largest holding.
Mr. Buffett has dubbed the tech giant a consumer products company. No matter what you call it, Berkshire Hathaway’s Apple investment has created staggering profits. Tim Cook’s iPhone maker has charmed the Oracle of Omaha. Berkshire seems content to not-pay-taxes and hold this incredible profit engine.
We certainly understand his view and that of other Apple bulls. At 199 ranked, our model sees shares of Apple for what they are: a fantastic company trading at an unforgiving multiple. This leaves the stock in the dreaded land of “neutral,” an issue we detailed in Apple II Flashback: The Fantasy of Predicting the Future.
Get our insights direct to your inbox: SUBSCRIBE
Warren Buffett’s Apple Investment vs. a Popular Growth Stock
Unlike some other bloated market caps that rest on little to no profits, Apple is an extraordinary cash machine. Yet, in its most recent earnings report, the company showed the inevitable headaches around the law of large numbers.
Quite simply, growth gets harder as you mature into a monolith as shown in the below chart.
Source: Otavio Costa at Crescat Capital
At 30x monstrous ex-growth earnings, Apple’s PE ratio leaves little room for any equity risk premium. Yet this is hardly an anomaly, particularly in the land of big tech stocks.
As KCR has extensively documented, US stocks currently sit at near-record multiples on record margins. The investing public is as bullish as any time in history on American equities. This stands in sharp contrast with 1989.
In that awful year, the investing public found little to like about US equities. The S&P traded at a 50% lower multiple on margins that were half today’s record levels.