Buffet Reduces His Shares in Apple (Once More)
Buffet Reduces His Shares in Apple (Once More)
Berkshire Hathaway's (BRK.A 1.37%, BRK.B 0.86%) cash reserves reached an all-time high in the third quarter. Overseen by investor Warren Buffett, the company is continuously decreasing its equity portfolio and now holds approximately $325 billion in cash on its balance sheet. Although this doesn't suggest Buffett is making a market prediction, the 'Oracle of Omaha' appears to be more conservative in his investments, given the market's current upward trend towards record highs. In his words, "Buy when others are fearful."
Buffett's primary source of increasing his cash reserves has been through Apple (AAPL 1.88%). Throughout 2022, he has consistently divested from the tech giant. In the third quarter alone, he offloaded yet more shares, lowering Berkshire Hathaway's stake to an estimated 300 million shares, worth around $69.9 billion. Earlier in the year, he sold almost 400 million shares, decreasing the company's stake by almost half.
Even as Buffett reduced Berkshire Hathaway's Apple position, the stock continued to surge, having climbed by about 25% over the previous 12 months. This improvement may give other shareholders the opportunity to pare down their positions in the technology giant at a beneficial time. Let's delve deeper and examine whether now is the right moment to sell off Apple stocks from your portfolio.
Sluggish revenue growth, antitrust threat
Apple reported its Q4 and full fiscal 2024 earnings at the end of October. The tech giant registered an increase in revenue for the quarter, up 6% year-on-year to $95 billion. This growth was attributed to iPhone sales and the company's lucrative software services division. For the entire fiscal year, software services revenue reached $96 billion, increasing from $85 billion the previous year.
While this quarter saw strong growth, Apple's revenue has lagged behind its bigger tech counterparts over the past few years. Its revenue and free cash flow have yet to surpass their peak values, which occurred in the middle of 2022. In comparison, Alphabet, Amazon, and Microsoft have reported more consistent and faster revenue growth than Apple during this period. It's possible that this revenue growth deceleration is the reason behind Buffett's substantial reduction in Apple's stock holdings.
The iPhone continues to post impressive sales figures for Apple. However, it is other parts of the company that are underperforming. The iPad and wearables (watches/headphones) segments reported a decline in revenue last fiscal year, and these are newer products than the iPhone. Matters have worsened with the release of the Vision Pro this year. This expensive gadget, while hyped up, has turned out to be a massive flop and financial loss for the tech giant. Few users are currently using it.
Another potential worry for Buffett could be the antitrust lawsuit involving Google Search. Google pays Apple an estimated $20 billion annual fee for being the default search engine choice on its devices. The government is considering whether this arrangement should be deemed unlawful due to competition concerns. If the ruling goes against the companies, Apple could stand to lose $20 billion in annual profits almost instantly. This would be a significant portion of the $123 billion in operating earnings recorded in 2022.
Should you follow Buffett's lead?
Apple's business presents a complex picture, with iPhone and software services contributing to steady earnings, but presenting some downside risks due to weak demand in any new product lines and the antitrust lawsuit involving Google Search. I don't believe these factors significantly impact Buffett's investment decisions. He has repeatedly stated that Apple's strong brand and the switching costs connected to joining its hardware ecosystem serve as a 'moat.'
I think the primary reason behind Buffett divesting from Apple is valuation. The stock carries a price-to-earnings ratio (P/E) of around 36 at present, which is an expensive multiple for a low-growth business. When Buffett first invested in Apple, its P/E ratio was between 10 and 15. Buffett also mentioned earlier in the year that he expected US corporate tax rates to rise due to the significant spending deficit of the federal government.
Should you trim Apple stocks along with Buffett if it is a significant position in your portfolio? With the stock trading at an inflated P/E multiple, undoing a large stake may be strategically sound, as Buffett himself has done. However, the company still maintains a strong competitive edge and a powerful brand. As long as this remains the case, there seems little reason to ditch your entire position altogether.
Given Berkshire Hathaway's reduction in Apple shares and Buffett's focus on value investing, considering reinvesting the proceeds into sectors with promising growth and value may be a viable option for some investors. Buffett's rationale for selling Apple shares primarily revolves around the stock's high valuation, potentially making it an appealing time for others to reconsider their holdings.
In light of Apple's sluggish revenue growth compared to competitors and the potential antitrust lawsuit impact, it might be prudent for investors to diversify their portfolio and consider other investment opportunities that align with their risk tolerance and financial goals.