- Apple represents the largest stock holding in Berkshire Hathaway’s portfolio.
- Recent sell-offs have made the tech giant begin to look like a solid value buy.
- Concerns about shrinking growth could undermine that value.
As of the most recent SEC filing, Berkshire Hathaway’s largest holding was Apple, with over 250 million shares worth a collective $37.4 billion as of market close on Friday. That’s about $20 billion less than that same holding would have been worth at the start of the fourth quarter, which could have some wondering if the Oracle of Omaha has finally lost his magic touch.
Warren Buffett, however, doesn’t appear to be letting the recent swoon drive him away from the stock. In fact, Buffett — who famously advised to “be fearful when others are greedy and greedy when others are fearful” — could be in the process of once again swimming against the current and hopping on a stock when the rest of the market is undervaluing it.
AAPL Trading Like a Value Buy
It might seem a little absurd to be talking about a stock like Apple — it of the $1 trillion market cap — as “undervalued,” but there’s a clear argument to be made that its current price represents a steep discount on what the underlying numbers would indicate.
Starting with the simplest and most direct metric, Apple’s current P/E ratio comes in at just 12.34 — a level that would be enviable for most banks or other established stocks, let alone a tech company like Apple. And for all of the valid concerns about slowing growth in China, Apple’s projections for growth would appear to show the stock could be in good shape for the near future as well — with a forward P/E ratio of just 10.05 and a PEG ratio under 1.
All of this is to say that, based on how much money it’s actually making, Apple appears to be a pretty solid stock that’s gotten caught up in the huge sell off for the rest of the FAANG stocks. However, unlike those companies, Apple has much stronger financial footing. Compared to Apple, the other major tech stocks have relatively high P/E ratios: Alphabet is at 40.26, Amazon has a whopping 91.28, Netflix at an even higher 112.46 and Facebook appears to be the second-best value buy of the group at just 20.81. And Microsoft? The company that briefly made news by surpassing Apple in November 2018 as the most valuable company in the world until Amazon took over the top spot in January 2019? Currently trading at a P/E ratio of 42.43. Apple has since dropped to the fourth most valuable public company.
Could Buffett Be Wrong?
So, has the market overreacted and pushed Apple to a low valuation that investors should be taking advantage of? Certainly, betting against Warren Buffett has a pretty lousy track record, historically, but there are reasons for concern that could erode the company’s appearance as a rock-solid value stock.
Most notably, Apple’s appearance as a solid value stock is based on its current sales and profits. Should those start to decline significantly, it could mean that the P/E ratio noted earlier is more of a mirage than a buy signal. That’s why Wednesday’s news that Apple was cutting its revenue forecast for the last three months of 2018 to a “mere” $84 billion due to slowing growth in China hit the stock so hard. If Apple’s long reign atop the heap for device sales is waning, it would make the stock more of a value trap on its way down than a beaten-up stock due for a rebound once markets begin to regain steam.
Keep reading to find out why it makes more sense to invest in Microsoft than Apple.
More on Investing
- Republican Tax Cuts Have Put $1 Trillion Back in Shareholders’ Wallets
- Pros and Cons of Online Trading
- Why Netflix Might Be in the Middle of a Bubble — and What You Should Do
- Watch: Secrets to Become a Great Investor
We make money easy. Get weekly email updates, including expert advice to help you Live Richer™.