3 reasons to like Apple stock

Billionaire investor Warren Buffett is a big shareholder in Apple (NASDAQ: AAPL). It is the largest publicly listed shareholding owned by his company Berkshire Hathaway. But over the past 18 months, Buffett has sold large amounts of his Apple stock.

Should I buy some of it, especially as the price is now 21% cheaper than it was in December?

Large, resilient market

When investing in a business I look at how big the potential market it serves is. It does not necessarily need to be huge, but I want it to be big enough that a business operating in that space could do well.

In tech circles, this is referred to as the “total addressable market”. What is Apple’s total addressable market? For starters, it includes computers. Add to that phones and digital watches. Then there are services, from the company’s digital app marketplace to its Apple Pay financial services offer.

Taken together that is a huge market. On top of that, demand for all of those items is likely to endure for a long time, in my opinion.

Strong pricing power

I have never heard someone say: “I was going to buy an Apple, but it was so cheap I wondered whether it would be good quality”.

The company is known for selling products at high prices, helping it generate attractive profit margins. Last year, on revenues of $395bn, net income came in at $94bn. That is a net profit margin of 24%, which I find very attractive.

That is no accident. Through investing heavily in brand-building marketing, developing proprietary technology and designing its ecosystem in a way that disincentivises users from going elsewhere, Apple has been able to create significant pricing power.

A sharp focus on efficiency

Think of a rival such as Samsung and start to list its products. You could be there all day! The Korean giant is in all sorts of businesses, selling a vast array of products.

Apple’s core range is very small. That is no accident. The company has made a strategic choice to focus on just a few items where it sees large opportunity and can build critical mass.

Focusing on the winners like that is, again, good for profit margins. It gives the company a clear focus and means that it is using its capital to do what it does well and knows consumers want.

That strikes me as a very efficient and profitable approach.

My one reason not to buy

So if I like Apple stock so much, why am I not plan to buy any following the recent crash in its price?

There are risks. Apple’s net income has declined for two years in a row and I see a risk that, if the phone becomes less central to daily life thanks to AI, iPhone sales could fall. Cheaper Chinese rivals also pose a risk to sales volumes in a weak economy.

But my reason not to buy yet is simple: the price has not yet fallen far enough.

Apple trades on a price-to-earnings ratio of 31. That is high in my book and does not offer me sufficient margin of safety as an investor. So although I see many reasons to like Apple stock, its price is not one of them.

The post 3 reasons to like Apple stock appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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