Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc.
Daniel Acker—Bloomberg/Getty Images
By Taylor Tepper
May 16, 2016

The most famous investor in America disclosed a massive new stake in one of the nation’s largest companies, Apple APPLE INC.


AAPL
0.34%

, and investors are jumping on the bandwagon.

Apple shares were up more than 3% in early afternoon trading.

Monday’s news couldn’t have come at a better time for the recently bruised Apple. In April the iPhone maker announced its first quarterly revenue drop in 13 years, raising fears that the tech behemoth may be losing its edge as a innovator.

Just as frightening, investors worry that the Cupertino, Calif.-based company may have finally run up against the law of large numbers. After exceeding a market capitalization of more than $750 billion last summer, the stock has sunk about 30%. Apple still is still worth more than $500 billion, but how much more can this company grow?

Apparently there’s still more runway ahead, at least so believes the Oracle of Omaha, who now holds more than $1 billion worth of the company’s stock.

The question is, how should investors regard Buffett’s bold move?

Has this octogenarian billionaire — who in the past avoided tech holdings because “we have no insights into which participants in the tech field possess a truly durable competitive advantage” — suddenly made Apple cool again?

Or has Apple slowed so much that it can now join a short list of drab tech names that dot Buffett’s portfolio?

That list, by the way, includes old guard leaders such as IBM INTERNATIONAL BUSINESS MACHINES CORP.


IBM
-0.15%

, whose earnings are expected to grow just 3% annually over the next five years, and Verizon Communications VERIZON COMMUNICATIONS INC.


VZ
0.62%

, whose earnings are forecast to grow a tepid 4%, according to Zacks.com. (Buffett is also offering financial support to a consortium that is seeking to buy Yahoo’s internet business).

For the record, Apple’s earnings are expected to grow less than 10% annually over the next five years, versus more than 40% for Amazon.com AMAZON.COM INC.


AMZN
0.81%

and 30% for Facebook FACEBOOK INC.


FB
1%

.

A New Apple

No, the world’s largest tech company isn’t ready to become old tech just yet. There’s still a great deal of future that the company hopes to conquer. After starting out in personal computers and expanding into smart phones and media, Apple is going big into personal automation and cars.

Apple recently announced that it had invested $1 billion of its own in a Chinese ride-sharing company, putting the company in direct competition with Uber. Many market observers believe that move will help deepen Apple’s quest to become a leader in the much-hyped self-driving revolution of the future.

To be sure, the Apple Watch hasn’t exactly set the world aflame as many may have hoped. But first-year sales did outpace the iPhone, selling more than 12 million in 2015 and dominating the smartwatch market.

Apple TV, meanwhile, has the potential to take on the “entire pay TV market,” according to one analyst on CNBC, if it can create a TV ecosystem through which people consume television. And Apple Music has the chance to capture a large audience of streaming audio customers.

All of which is to say: Apple’s future growth is much more than that phone in your pocket.

Too cheap to pass up?

With a price/earnings ratio of less than 10, Apple’s stock is attractively compared to the rest of the market. In fact, its P/E ratio is about a third lower than other technology stocks.

And while Apple’s profits aren’t growing nearly as fast as they once did, the company’s earnings are still expected to outpace the broader universe of tech rivals by 10% over the next five years.

On top of that, the dividends that Apple pays are greater than the current yield you can get on a 10-year Treasury bond.

“On a relative basis versus the S&P 500 Index, and compared to their prior lows, all valuation ratios are making new lows,” wrote William Koldus in Seeking Alpha. “Thus, Apple shares are undoubtedly selling at their cheapest valuations in ten years.”

Which means even if you think Apple is losing its innovative edge, you might want to think about adding Apple in that small sliver of your portfolio that allows for stock picking.

 

 

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