With a total stake of about $133 billion, Apple (AAPL 7.55%) it represents about 40% of Warren Buffett’s stock portfolio. So how the iPhone fares from year to year is important to Berkshire Hathaway (BRK.A 3.20%) (BRK.B 3.36%) shareholders as well as those of Apple. Big tech earnings have struggled for the third quarter of calendar year 2022, but Apple is doing well. It reported strong results despite growing concern that sales of the iPhone and other consumer electronics were falling, but that didn’t happen.
Apple once again proved that the typically tech-averse Buffett made the right bet on big tech stocks.
Not a sizzling growth story, but okay
Buffett and company hate flashy, trendy investments, which often drives him away from tech stocks in general. But Apple is a big exception to the nonagenarian rule. Apple is technology, but it has also built an incredible empire that continues to grow at a slower but steady pace, exactly the kind of investment that Berkshire Hathaway prefers.
Apple has just put the final lock on its fiscal year 2022 (which corresponds to the end of the third quarter of calendar year 2022). In the fiscal fourth quarter, Apple said revenue was up 8% year over year to $90.1 billion. This was driven by a nearly 10% year-over-year increase in iPhone sales ($42.6 billion, or 47% of total revenue) in the quarter. Mac sales also rose 25% year-over-year to $11.5 billion (13% of revenue) as increased supply helped meet consumer demand that was limited earlier this year and last.
Throughout September and October, media headlines racked up clicks reporting that iPhone production was winding down. This caused concern that Apple would be affected by the same slowdown of smartphones and PCs that other tech companies have been reporting. Suffice to say, that didn’t happen (although iPad sales are down 13%, but tablets make up just 8% of revenue these days).
How is the iPhone doing?
It appears that those iPhone production cuts were simply a reduction in production. increases. iPhone demand is pretty strong right now, especially as its popularity grows in emerging markets like India, Vietnam, Indonesia, and Mexico. As consumers in these markets accumulate wealth, it seems that a shiny new product from Apple is the pinnacle for getting a slice of American wealth.
Of course, iPhone 14 prices have risen in some markets (but not the US), and that’s no doubt helping to keep revenue on the rise. Nevertheless, same as last quarterCEO Tim Cook and the senior team continue to report that consumers are eating up the prices of premium phones and are still buying.
The dollar is an obvious issue to consider
However, not everything was perfect and a single external factor is stifling Apple’s strength: the inexorable rise of the US dollar. As a side effect of the US Federal Reserve’s historic rate hikes, the dollar has strengthened against other currencies by double-digit percentage this year. When companies like Apple make a sale abroad and then convert it back into dollars, that lowers reported growth.
Specifically, Apple CFO Luca Maestri said total revenue growth of 8% would have been six percentage points higher (or 14%) last quarter were it not for this kind of change.
King Dollar will charge a higher price to kick off Apple’s first quarter of 2023 (ending December 2022). Maestri said overall revenue growth will slow from the 8% just reported mainly due to an expected hit of nearly 10 percentage points from foreign exchange.
This will take an even bigger drag on operating profit. In the quarter just reported, earnings per share grew 4% year over year, below the pace at which revenue increased. That’s because once weakened foreign currency returns to Apple’s home in the United States, it’s also spent in stronger dollars, putting a damper on profit margins.
In any case, Apple continues to forecast a gradual expansion and eventually a strong dollar will cool off, and maybe even give some ground back to other currencies, which would be revenue and profit. benefit to Apple The iPhone company is not setting the world on fire with massively growing numbers. However, in light of the negativity out there about the state of the world economy, that’s totally fine. I’m sure Buffett himself is satisfied.
Apple stock is trading for just 24 times fiscal 2022 earnings at the time of this writing. If you think Apple can continue to deliver average single-digit earnings-per-share growth each year for the rest of the 2020s, that’s a fair premium to pay for this relative “safe haven” Buffett stock.
Nicholas Rossolillo and its clients hold positions in Apple and Berkshire Hathaway (B shares). The Motley Fool holds positions and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: Long January 2023 $200 Call on Berkshire Hathaway (B-stock), Long March 2023 $120 Call on Apple, Short January 2023 $200 Put on Berkshire Hathaway (B-stock), short January 2023 $265 Call on Berkshire Hathaway (B shares) and short $130 March 2023 calls on Apple. The Motley Fool has a disclosure policy.