According to one account, Warren Buffett first invested in Apple (NASDAQ: AAPL) in 2016 after hearing how devastated a Berkshire Hathaway director was after losing their iPhone in a taxi ride. The director described the experience saying, “I felt like I lost a piece of my soul.” The anecdote prompted Buffett to take a closer look at Apple, and ultimately determine its products had become indispensable to many people.
Since then, Apple has become 38% of Berkshire Hathaway’s portfolio, by far the largest holding. The second biggest is Bank of America at 10.6%.The iPhone company displays many characteristics Buffett looks for in a strong investment, including strong leadership, consistent long-term growth, and unique products that encourage brand loyalty.
Here’s why Apple is one Warren Buffett stock to buy hand over fist in 2023.
Apple is the king of consistency and reliability
A stock market sell-off in 2022 led the Nasdaq-100 Technology Sector index to plunge 40% throughout the year as macroeconomic headwinds significantly reduced consumer demand. The economically challenging year highlighted the importance of Buffett’s long-term approach to investing (the investor is often quoted as saying, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”). And Apple’s stock is a strong candidate for a long-term hold.
Apple shares sank 27% in 2022 but rose 244% over the last five years. Meanwhile, the company’s revenue increased 48% since 2018 to $394 billion, and operating income has soared 81% to $119.44 billion in the same period.
The company’s consistent growth is largely owed to the high demand for its products and services. According to Counterpoint Research, in 2022, Apple officially overtook Alphabet‘s Android in smartphone market share by crossing 50%. The achievement is especially powerful in Apple’s hands, with its walled garden of products that encourages consumers to sink deeper into its ecosystem with just one purchase.
Moreover, as Counterpoint Research director Jeff Fieldhack pointed out, “operating systems are like religions — never significant changes.” Consequently, the more consumers there are using iPhones, the more products the company is likely to sell over the long haul as people upgrade to new versions and other Apple products with a similar design language.
Apple’s excellent outlook, despite a potentially weak Q1
Apple is scheduled to release its results for its first quarter of fiscal 2023 on Feb. 2. Multiple analysts are projecting weak earnings after iPhone production issues last November led to insufficient supply during last year’s holiday season. As a result, Refinitiv analysts expect the company to report just over $121 billion in revenue, a slight decline from the $123.9 billion in Q1 2022.
However, as Buffett has stressed, a stock investment is not for short-term gains, and the company has made several moves to boost iPhone profits over the long term. Over the last month, Bloomberg has revealed that Apple is working toward maximizing operating income in its iPhone segment by leaning less on other tech companies for its components.
Changes such as swapping telecom and WiFi/Bluetooth chips from suppliers Qualcomm and Broadcom for in-house versions, along with using custom-designed displays in lieu of Samsung and LG Display screens, will significantly cut down costs. Additionally, Apple is working toward improving aspects of the iPhone’s OS, such as maps, search, and advertising, to create less necessity for Google apps. As the iPhone made 52% of the company’s revenue in 2022, Apple is wise to maximize the segment’s profits where it can.
The tech giant is further safeguarding its business over the long term by diversifying revenue with its swiftly growing services business. Apple services delivered a profit margin of 71.7% in 2022, compared to products’ profit margin of 36.3%. Meanwhile, services revenue grew 14% year over year, double the iPhone’s growth.
While Apple could be in for a challenging quarter and possibly year, its long-term outlook remains positive. The company has offered Berkshire Hathaway consistent gains since 2016 and is likely to continue doing so for the haul, making it a stock to buy hand over fist in 2023.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Dani Cook has positions in LG Display. The Motley Fool has positions in and recommends Alphabet, Apple, Bank of America, Berkshire Hathaway, and Qualcomm. The Motley Fool recommends Broadcom and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.