It’s no secret that Warren Buffett is a huge admirer of Apple (NASDAQ:AAPL). The stock makes up just under half of the Berkshire Hathaway stock portfolio.
Buffett has been open about his admiration for the company for a long time and the stock has performed very well, increasing by almost 300% over the last five years.
However, Apple shares have struggled a bit recently. Since the start of the year, the share price has fallen from $182 to $146.
It’s unusual to find shares in a quality business coming down in price and Buffett himself has been increasing Berkshire’s holding recently. So should I be buying shares for my own portfolio?
A success story
Apple’s share price success has been driven by a few things. Clearly, one of them is the growth of the underlying business.
Over the last five years, Apple has increased its revenues by 69% and its net profits by 123%. Earnings per share during that time have grown by a huge 196%.
Recently, though, Apple’s stock performance has been turbocharged by its share repurchase programme. Since 2018, the company has spent just under $300bn buying back its own stock, decreasing the outstanding share count by around 17%.
Can it continue?
Apple has undoubtedly been a success story as a stock and as a business. The question for investors like me, though, is whether it can continue.
There are two major reasons for thinking that Apple’s best days might be behind it. The first is that its growth is likely to slow down and the second is that the pace of buybacks is likely to decrease.
Apple is currently dealing with lockdowns in China (where it manufactures a lot of its devices) and a weak economic outlook in the US, where it sells many of them. Together, these are likely to slow down the company’s revenue growth as it can sell fewer devices.
In addition, Apple’s balance sheet is approaching a level where it will have used its excess capital for buybacks. As a result, the company will repurchase shares at a slower rate.
These are both significant issues. But I don’t think that either constitutes a major risk going forward.
I expect Apple’s manufacturing to normalise reasonably soon. I also believe that Apple’s devices are embedded in people’s lives in such a way that it will continue to claim a share of US consumer spending even in a tighter environment.
While it’s true that the company will eventually run out of excess cash to buy back shares with, it generates huge free cash flows from its business. These, in my view, will keep the share repurchase programme going at a good – albeit slower – rate.
Conclusion
I don’t own Apple shares in my portfolio and I don’t anticipate buying them imminently. I think that patience is the key here.
The pessimism around the economic outlook has a way to go yet, in my view. As a result I think that I’ll get better opportunities to invest in Apple shares in the future.
I’m going to be watching the stock carefully this year and I’ll be ready to invest at $135 per share or below. At those levels, I think that the potential rewards for the long term outweigh the risks in the near future.
