Finding Value in Apple’s $3+ Trillion Moat
- Apple"s stock has lost 10% in recent weeks
- Despite the sell-off – it"s still expensive
- And what I would be willing to pay (and why)
In the last three months of 2025, the tech sector experienced what some called a "correction".
But what is a true correction?
Technicians will be quick to say a drop of 10%.
But for me that doesn"t work… I would say a better definition is reversion to the mean.
We are a long way from that.
The so-called tech selloff was not from investors going into cash out of fear; hedge funds and other large institutional investors were, in fact, rotating out of tech stocks and into more defensive names (something I suggested last quarter)
While the Mag 7 has been leading the S&P 500 to stratospheric heights – I"ve warned about excessive valuations.
Yes, there is little argument that the Mag 7 are exceptionally high quality(Tesla the exception). However, what you pay for that quality is the question.
You can still lose a lot of money buying great stocks.
With respect to valuations – there are some high profile names warning that prices are becoming unreasonable:
- Michael "The Big Short" Burry (shorting PLTR)
- Rishi Jaluria of RBC Capital
- Jay Goldberg at Seaport Research (sell on Nvidia)
- Alexander Haissi of Redburn; and last but not least
- Warren Buffett reducing his Apple stake by 60%
This missive is focused on Apple.
Buffett makes no secret that Apple is one of the greatest businesses that Berkshire has invested in.
He singled out CEO Tim Cook in a recent meeting saying Apple has contributed more dollars to Berkshire"s bottom line than any other company in its history.
Apple remains Berkshire"s largest holding at ~22%. However, there was a time when this was greater than a 50% weighting (Berkshire"s Top 20 holdings below)
| # | Company | Symbol | Portfolio % | Price |
|---|---|---|---|---|
| 1 | Apple Inc | AAPL | 22.17% | 259.18 |
| 2 | American Express Co | AXP | 20.44% | 375.83 |
| 3 | Bank Amer Corp | BAC | 11.39% | 55.93 |
| 4 | Coca Cola Co | KO | 10.12% | 70.36 |
| 5 | Chevron Corp | CVX | 7.10% | 162.28 |
| 6 | Moodys Corp | MCO | 4.71% | 531.8 |
| 7 | Occidental Pete Corp | OXY | 4.08% | 43.03 |
| 8 | Chubb Limited | CB | 3.45% | 306.81 |
| 9 | Kraft Heinz Co | KHC | 2.74% | 23.44 |
| 10 | Alphabet Inc | GOOGL | 2.10% | 329.15 |
| 11 | Davita Inc | DVA | 1.29% | 111.49 |
| 12 | Kroger Co | KR | 1.07% | 59.5 |
| 13 | Visa Inc | V | 1.04% | 350.13 |
| 14 | Sirius Xm Holdings Inc | SIRI | 0.98% | 21.7 |
| 15 | Amazon Com Inc | AMZN | 0.89% | 247.53 |
| 16 | Mastercard Inc | MA | 0.82% | 576.15 |
| 17 | Verisign Inc | VRSN | 0.80% | 246.5 |
| 18 | Constellation Brands Inc | STZ | 0.71% | 147.18 |
| 19 | Capital One Finl Corp | COF | 0.64% | 250.15 |
| 20 | Unitedhealth Group Inc | UNH | 0.62% | 344.18 |
Alphabet (a recent addition) represents 2% of Berkshire"s holdings; and Amazon less than 1%.
We know that Buffett made the decision to buy Apple; however we cannot say the same about Alphabet and Amazon (i.e., more likely his delegates)
The question is whether Buffett proceeded to sell more of the iPhone maker during his last quarter as CEO?
We will find out around Feb 15th (i.e., 45 days after the quarter ends) when 13F filings are due.
It"s possible – as the stock is now ~10% off its recent highs.
Apple"s Chart
Apple"s record close was $288.62 at the start of December. However, over the past 5 weeks it"s trended lower to trade ~ $259 at the time of writing.
From a technical lens, the stock remains in a long-term bullish channel – with the slope of the trend showing a CAGR of ~15% for the past 8 years.
However, recently we are seeing negative divergence which suggests some momentum is coming out of the name.
But to answer whether this is a good risk/reward zone – we need to look into the numbers and specifically the valuation.
Apple: A Strong Compounder
From my lens, Apple is almost unmatched in terms of its free cash flow, returns on invested capital, net profit margins and strength of its operating moat.
They boast around ~2.5B+ sticky users on its hardware + software + services ecosystem.
I think I"ve said this before, but I own 8 Apple products.
iPhone(s); Watch; Laptop(s); iMac; iPad and Buds. I cannot tell you another brand where I own 8 of their products. What"s more, I don"t think twice when it comes to refreshing hardware every ~3 years.
And this is what Apple owns: distribution.
When you own the distribution of how consumers enjoy digital products (e.g., mail, music, news, photos, media apps, etc) — it puts you in a very powerful position.
This is why we see great momentum in the stock – it has been a cash printing machine (more on this later when we look at valuation).
But are we getting value at "$260 per share?"
Let"s start with how they finished their most recent quarter (September 2025)
- Revenue up 8% YoY to $102.5B
- Earnings per share (EPS) +12.8% to $1.85 for the quarter (adjusted for GAAP);
- iPhone sales up 6% to $49B; and finally
- Services revenue up 15% to $28.8B (a new record)
Given the launch of their 17th generation iPhone last quarter – and a new array of Apple Watches – I expect the December quarter to handily exceed expectations.
Based on the expected strong performance of these products – analysts see fiscal 2026 revenue coming in at $450B; with earnings per share expected to rise to $8.25 – which would represent around 10% YoY growth.
What"s also worthwhile is examining how Apple has performed over the past 5 and 10 years in terms of revenue, earnings, cash flow, dividends and book value.
| Ann Rates of Change p/sh | Past 10 Years | Past 5 Years | Est to 28–30 |
|---|---|---|---|
| Revenue | 14.00% | 13.50% | 10.00% |
| Cash Flow | 14.50% | 15.00% | 11.00% |
| Earnings | 15.00% | 17.50% | 11.50% |
| Dividends | 11.50% | 7.00% | 8.00% |
| Book Value | -2.50% | -8.50% | 11.00% |
The company shows exceptional consistency in its economic engine; i.e.,
- Revenue, cash flow, and earnings have compounded at mid-teens rates for a decade
- Growth has accelerated over the past 5 years despite Apple already operating at large scale
- Forward estimates imply moderation, not deterioration — exactly what you"d expect at Apple"s scale
Now you might say that Book Value appears alarming given its negative… but you need to understand Apple and what they are doing with the shares.
Given Apple has massively repurchased shares; returning more capital than cumulative earnings; and using debt to strategically to fund buybacks — this causes equity to fall below book value (resulting in the negative numbers).
But this is Apple saying "we don"t need capital to grow". For example:
- Apple earns far above its cost of capital
- Retained earnings are less valuable than buybacks at Apple"s ROIC (which is above 20%)
- Book value becomes economically irrelevant for more "IP-driven" companies
Here is the (shortened) set of metrics that I like to track (typically over 5 and 10-years):
| AAPL | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | Est. 2026 |
|---|---|---|---|---|---|---|---|---|
| Total Sales p/sh | 14.64 | 16.17 | 21.55 | 24.73 | 24.65 | 25.87 | 28.17 | 32.75 |
| Cash Flow p/sh | 3.82 | 4.03 | 6.24 | 6.96 | 6.98 | 6.96 | 8.44 | 9.50 |
| Earnings p/sh | 2.97 | 3.28 | 5.61 | 6.11 | 6.13 | 6.08 | 7.46 | 8.25 |
| Dividends p/sh | 0.75 | 0.80 | 0.85 | 0.90 | 0.94 | 0.99 | 1.03 | 1.10 |
| Book Value p/sh | 5.09 | 3.85 | 3.72 | 3.18 | 4.00 | 3.77 | 4.99 | 5.40 |
| Common Shares (000s) | 17.8M | 16.98M | 16.98M | 15.94M | 15.55M | 15.12M | 14.50M | 13.75M |
| Long-Term Debt | 91,807 | 98,667 | 109,106 | 98,959 | 96,140 | 85,750 | 80,000 | 71,000 |
| Shareholders" Equity | 90,488 | 65,339 | 63,090 | 50,672 | 62,146 | 56,950 | 66,000 | 74,250 |
| Capital Spending p/sh | 0.59 | 0.43 | 0.65 | 0.67 | 0.70 | 0.63 | 0.86 | 0.85 |
| Total Sales ($M) | 260,174 | 274,515 | 365,817 | 394,328 | 383,285 | 391,035 | 416,161 | 450,000 |
| Operating Margin | 29.4% | 28.2% | 32.9% | 33.1% | 32.8% | 34.4% | 34.3% | 34.0% |
| Net Profit ($M) | 55,256 | 57,411 | 94,680 | 99,803 | 96,995 | 93,736 | 112,961 | 118,850 |
| % Return Total Cap | 31.5% | 36.5% | 55.8% | 67.7% | 62.5% | 65.7% | 75.0% | 83.0% |
| % ROE | 61.1% | 87.9% | 150.1% | 197.0% | 156.1% | 164.6% | 153.2% | 160.0% |
Why Buffett invested so heavily into this stock was the power of its compounding per-share economics.
Through margins, buybacks and disciplined reinvestment – they are in a class of their own. For example:
- Sales p/sh more than doubled from $14.64 → $28.17 (2019–2025)
- Earning p/sh rose from $2.97 → $7.46 (~2.5×) – outpacing sales growth.
- Cash flow p/sh followed the same trajectory.
- Shares outstanding fell from 17.8B → 14.5B (–18%).
- Operating margin: ~29% → 34%
- Net margin: ~21% → 27%
What we see is a consistent record of holding pricing power; monetizing services; and scaling fixed costs efficiently.
But what has analysts rewarding Apple with a high multiple is the (inevitable) expansion into on-device AI across all of its product lines (similar to Google) – which will power the next "upgrade" cycle.
For example, their services business is already their most profitable – with gross margins of around 75%(vs ~36% for its other products). It"s also where they are seeing strong double digit growth.
So What Is it Worth?
This is the question which is the most difficult to answer…
At present, the market is willing to pay ~31.5x forward earnings (based on projections of $8.50 per share in 2026)
Personally, I would much rather assess the value of Apple using:
- EV/EBIT: ~30x (vs 10-year median of 21.4x)
- P/FCF: 39.6x (vs 10-year range being 8.54 to 42.4)
It"s my view the market is currently treating Apple as a "AI-pure-play" utility.
To be fair, it deserves an above market multiple – however at P/FCF of 40x – I have strong reservations about the growth expected.
Put another way – the downside risk is greater than the upside reward (assuming they get it right).
For example, if we assume that margins compress even slightly (from the current 34.4% operating margin) or if hardware cycles lengthen, a "mean reversion" to the 21.4x EV/EBIT median would result in a ~25% haircut in share price, even if earnings stay flat.
Some back of the envelope math with a reverse DCF:
- Current FCF p/sh: $6.96 (2024 Actual)
- Current Price: $259.18
- Discount Rate: 10%(standard benchmark)
- Terminal Multiple: 20x (using the 10-year median)
To justify the current price, Apple must grow its FCF at 14.5% compounded annually for the next 10 years.
If they were to do this – this would put their FCF at $27 per share in 2035 – or an FCF of over $350 Billion (3.5x today"s level at $98.9B).
Put another way – growing FCF at 15% p/yr at Apple"s scale – with US GDP at ~2.5% – Apple would become the economy!
As an aside, I"ve used a similar argument when valuing Nvidia.
Bottom line is paying a P/FCF ratio of 40x is extremely high. It"s why Buffett took ~60% of his chips off the table (and maybe more in Q4).
Now, when Buffett first acquired the stock in 2016 – it generated $2.63 p/sh in FCF.
He paid ~$23 per share or ~9x its free cash flow.
That"s a very reasonable multiple to pay for a quality business (and the certainty of their earnings).
Today, given their position in the market, paying between 20x and 22x is a reasonable multiple (where 22 x $9.50 = $209.00)
For example, if we assume a 4-year bet, this is my logic:
- 15% CAGR on $209 → the stock needs to grow to ~$365 in 2030.
- 2030 FCF: If the multiple stays at a "moated" 20x in 2030 – Apple would need to generate $18.25 FCF p/sh
- Implicit Growth Rate: This requires a 17.7% CAGR over those four years
Possible? Yes. Probable? Mmm – things have to go right.
To hit $18.25 FCF by 2030, Apple cannot just grow revenue; it must significantly improve FCF conversion.
Therefore, we will need to keep a watchful eye on things like AI infrastructure build outs.
For example, if those costs remain high, FCF might lag behind Net Income (where the same can be said for all hyper-scalers)
Putting it All Together
Apple is a terrific company. World class.
Along with Google – it"s how most consumers will experience AI over the next couple of years (e.g., as Google looks to integrate AI across is 2B+ user surfaces – Search, Maps, Gmail, Photos etc).
Repeating what I said earlier — one of the most powerful operational moats Apple enjoys is its distribution.
That is extremely hard for any company to replicate anytime soon (and many have tried)
However, it doesn"t matter how good the company is, paying 40x P/FCF means everything has to go right.
On the other hand, if paying 22x 2026 FCF (~$209 to ~$220)– this is a reasonable mid-term bet for a high-quality compounder.
However, that also requires a ~22% correction in the share price (something we have seen many times in the past with Apple)
Therefore, I"m happy to sit this one out.