In the third quarter, Warren Buffet reduced his Apple shareholdings, contrasting the purchasing behaviors of other wealthy investors. The question arises: Should it be regarded as a purchase, sale, or maintain stance?
Berkshire Hathaway, led by Warren Buffett, has been one of Apple's major shareholders in recent years. Buffett initial investment in Apple happened towards the end of 2016, and by the end of 2023, Berkshire owned $174 billion worth of Apple shares.
However, Buffett's sentiment towards Apple investment seems to have shifted. By the third quarter, Berkshire's Apple stake had been reduced to 300 million shares, down from over 905 million shares in 2023. Buffett had earlier mentioned that Berkshire will still hold Apple shares even when he is no longer the CEO.
Interestingly, other billionaire investors like Ole Andreas Halvorsen of Viking Global Investors and John Armitage of Egerton Capital were buying Apple shares during the third quarter. This mixed signal raises a question: Is Apple still a good investment or should you consider selling like Buffett?
Apple's Growth Potential
Apple's total revenue grew by just 2% year over year in fiscal 2024. However, investors have shown interest in Apple since it announced new AI features for its devices. The company introduced Apple Intelligence in October and investors expect improved sales growth. The stock price has increased by nearly 19% year to date, despite slow sales growth for Apple's device lineup.
The AI update is seen as a significant catalyst for iPhone sales, which make up over half of Apple's revenue. Investors expect more iPhone users to upgrade to the latest devices with powerful processors capable of running Apple Intelligence. The AI features require an Apple device with at least an M1 processor or later. Increased demand for Apple devices will also boost demand for services, which have a double the gross profit margin compared to devices.
Wall Street analysts expect Apple's annual revenue growth to exceed 5% in fiscal 2025 and accelerate to over 8% in fiscal 2026. Earnings per share is expected to grow at nearly 10% on an annualized basis, given the increased contribution of higher-margin services to Apple's total sales.
Valuation Concerns
Apple's strong brand and loyal customer base have helped it achieve an all-time high in its installed base of active devices. Buffett's fondness for Apple's sticky relationship between the product and customer is well known. However, Apple's valuation seems to be on the expensive side with a high P/E ratio of 37 compared to the S&P 500's average P/E of 30. Buffett typically doesn't sell his winning investments due to their high valuation, but Apple's valuation is starting to look somewhat frothy.
Buffett mentioned at the Berkshire shareholders' meeting in May that he was comfortable building a larger cash position under current market conditions. This could explain his decision to sell Apple, which remains Berkshire's largest investment despite the reduction in stake. Other billionaires buying the stock are betting on Apple reporting better earnings growth than the consensus estimate and justifying the current valuation.
Investors can consider other large-cap tech companies with faster earnings growth and lower valuations for better return prospects. Therefore, I wouldn't call Apple a buy right now, but if you already own shares, you might not want to sell since Buffett's reasons for selling could be unique given the size of the investment at the beginning of the year.
For now, I would classify Apple as a hold. Its push into AI might surprise on the upside, as great businesses usually do.
Despite Buffett's decision to reduce Berkshire's Apple stake, he still acknowledges Apple's potential, expressing his belief that Berkshire will hold Apple shares even after his departure as CEO. (follows from the second paragraph of the text)
Investors looking for tech companies with faster earnings growth and lower valuations might find better return prospects, considering Apple's expensive valuation at the moment. (follows from the last paragraph of the text)
