The technology company Apple (NASDAQ: AAPL) has been both a successful company and a lucrative investment for many investors. Indeed, since Warren Buffett decided to buy Apple shares five years ago, it has ended up being his largest position. It has earned Buffett a paper profit for him in excess of $100bn.
This week the company’s market capitalisation has been close to reaching $3 trillion. Is now the time for me to buy Apple shares for my portfolio, or am I too late?
Apple’s onward march
For years now, bears have suggested that the Apple story is in danger of running out of steam. Where are the new products? Where is the visionary leadership? What about the threat posed by cheaper competitors?
I think some of those concerns have merit. I do see a risk that the rise of less costly smartphones could hurt Apple revenues and profits over time, for example. But so far, I think the company has proven to be highly resilient. Last year it recorded revenues of $365bn. That means that on average the company is making around $40m of sales every hour of the year. Profits were also enormous, at $109bn.
So I don’t find the bear case very persuasive. In fact, some of what is seen as weakness for Apple actually reflects its strength in my opinion. Take the perceived lack of innovation. Apple is basically focusing on a tightly controlled, small portfolio of products. That helps reduce complexity from the supply chain. It also means the company doesn’t dilute profit margins by getting into hundreds of less lucrative product areas.
That doesn’t mean there aren’t risks. An economic downturn could hurt demand for Apple’s premium products, damaging revenues and profits. Its juicy services margins could also be cut by the threat of regulatory action, something we’ve already seen when it comes to the company’s app store.
I’d buy Apple shares at today’s valuation
With the Apple share price touching new highs recently, is this bullishness fully factored into its valuation?
I don’t think it is. In fact I see further upside potential for the Apple share price over the long term, although in a volatile tech market there could be ups and downs along the way. That doesn’t bother me, though, as I reckon Apple has the potential to be a cash machine for decades to come. It’s reinvented itself for changing circumstances before – Apple has been listed on the stock market for over 40 years already.
Apple has a huge customer base. Many of them are deeply integrated into its product and service ecosystem. That makes them less likely to switch to other brands because of the time and effort it would require. The company has massive economies of scale. Its iconic brand continues to give it pricing power, which I expect to endure.
Its price-to-earnings ratio of 32 is not cheap. But I don’t think it’s expensive given my confidence that Apple can keep increasing its earnings in coming years. I’d be happy adding the company to my portfolio at that price. I don’t know if Apple will ever reach a $4tn valuation, but if it does I don’t want to be kicking myself for having missed an opportunity.