Warren Buffett has done it again! The legendary Berkshire Hathaway CEO outperformed the market in 2022. His company’s share price climbed 3% over 12 months while the S&P 500 index declined 20%.
I think it’s always worth monitoring what shares Buffett is buying as inspiration for my own portfolio. After all, his success from investing in the stock market over decades is arguably unparalleled.
With this in mind, it’s notable that one company eclipses Berkshire’s other holdings. I’m talking about US tech titan Apple (NASDAQ: AAPL).
Warren Buffett’s top stock
Apple represents around 38% of the Oracle of Omaha’s portfolio by market value, according to the latest filings. He’s owned shares in the smartphone maker since 2016.
One reason I believe it’s so dominant in Berkshire’s portfolio is the astonishing Apple share price performance since Buffett first took a position. Shares in the world’s most valuable company soared over 200% in the last five years alone.
Berkshire’s second and third largest positions in Bank of America (11%) and Chevron (10%) are dwarfed by comparison. What’s more remarkable is Buffett has been taking profits too. He sold over 10% of his Apple position in the past 10 quarters.
I can see why the billionaire investor’s a big fan of Apple stock. It’s an instantly recognisable global brand with a huge digital ecosystem designed to maintain consumer loyalty. This translates into large profits.
The business has occupied pole position in the US for a while now, but I’m particularly encouraged to see it broke new records in China recently. Apple’s market share in China reached 25% in October. This means one in every four smartphone devices sold was an iPhone.
In addition, the company’s pricing power has allowed it to improve its gross margins, offsetting headwinds from a stronger dollar and rising inflation. The combined gross margin for products and services was 43.3% in 2022, up from 38.2% in 2020.
Risks
Apple stock isn’t without risks. The company’s supply chain remains problematic. Over 90% of its products are manufactured in China. The Chinese Communist Party’s handling of the pandemic has been chaotic. A recent U-turn on its ‘zero Covid’ policy has resulted in surging cases.
There’s also the potential for a future flashpoint if China invades Taiwan. Russia’s invasion of Ukraine was a reminder that the current geopolitical order is fragile. If there was military escalation over Taiwan, I wouldn’t be surprised if Western countries levy sanctions. This could damage Apple’s growth prospects.
The valuation also looks quite high. At a price-to-earnings (P/E) ratio above 21, Apple trades at a premium compared to the S&P 500. Global recessions could hit demand for the company’s products. The combination of a high P/E ratio and slowing growth suggests the stock could fall further, compounding its 29% decline during 2022.
Should I buy Apple?
Despite the risks, Apple looks attractive to me. The company has a history of beating competition through innovation. I see few signs other companies will displace it.
I’m wary the share price could fall in 2023. To smooth the ride, I’d dollar-cost average (investing equal amounts of money at regular intervals) into the stock, capitalising on buying opportunities that materialise.
I’ll buy any dips, keeping an eye out for share price movements after the earnings release on 26 January.
