Berkshire Hathaway sold its Apple shares in the second quarter even as the launch of Apple Intelligence nears.
In 2016, Berkshire Hathaway surprised Wall Street by acquiring a stake in the hugely popular consumer electronics company Apple (AAPL 0.36%). CEO Warren Buffett, who reportedly controls a large portion of the company’s investment portfolio, had previously avoided technology stocks because they were clearly outside his purview.
Wall Street was even more surprised when Apple eventually became Berkshire’s largest stock, a position it still holds today. However, in retrospect, Buffett’s asset allocation decisions were brilliant. Including dividend payments, Apple stock has returned 860% since his company first bought the stock.
However, Berkshire sold 389 million Apple shares in the June quarter, reducing its position by nearly 50%. That happened despite Buffett saying last year that Apple was a “better company” than any other company in Berkshire’s portfolio. Additionally, his company sold stock ahead of Apple Intelligence’s launch, which could be a major catalyst.
Finally, Apple has a consensus rating of Buy among Wall Street analysts, and the median 12-month target of $250 per share represents approximately 8% upside from the current stock price of $231. means. All these facts lead to one conclusion. Buffett must know (or suspect) something that Wall Street doesn’t.
Apple has an enduring competitive advantage in its brand authority and pricing power
Warren Buffett praised Apple CEO Tim Cook’s great leadership and praised the company for continuing to return capital to shareholders through dividends and stock buybacks. But what Buffett admires most about Apple is its pricing power, once saying that the iPhone “might be the best product ever.”
Apple leverages deep engineering expertise to design custom chips and combines cutting-edge hardware with proprietary software and services to create differentiated user experiences. Unlike the open-source Android operating system, iOS and macOS are closed-source operating systems and cannot be adopted by third-party device manufacturers.
As a result, Android devices are much more common, but Apple products are much more expensive. Consumers are willing to pay a premium for the Apple experience. For example, the average iPhone currently sells for three times the price of the average Samsung (Android) phone, according to Counterpoint Research.
This pricing power is a product of brand authority and is itself a major competitive advantage, helping Apple secure a strong presence in several consumer electronics categories. The company leads the market in smartphone sales and ranks second behind Samsung in terms of smartphone shipments. Apple also ranks first in smartwatch and tablet shipments, and fourth in PC shipments.
In addition to selling hardware, Apple grows its installed base (more than 2.2 billion active devices) with services such as App Store downloads and advertising, iCloud storage, subscriptions like Apple TV+, and financial services like Apple Pay. is monetized. The company has a strong presence in several relevant markets. The company operates the largest mobile app store by revenue, and Apple Pay is the most popular in-store mobile wallet among U.S. consumers.
Buffett cuts Berkshire’s Apple stake before big deal happens
Apple is scheduled to release iOS 18.1 on October 28th. A long-awaited software update brings a set of artificial intelligence (AI) features called Apple Intelligence to iPhone 16 and select iPhone 15 models. Some industry observers expect Apple Intelligence to drive a historic iPhone upgrade cycle while laying the foundation for future paid AI services.
In fact, Wedbush analyst Dan Ives said Apple Intelligence is “a clear path to a multi-year product upgrade cycle.” Morgan Stanley analysts came to a similar conclusion, calling Apple Intelligence “as close to a true smart virtual assistant as you can get on the market today.” This raises the question of why Buffett sold his Apple stock ahead of what could have been a big catalyst.
Buffett said the decision was based on his belief that the government would raise corporate tax rates in the future to address the growing budget deficit. In that scenario, by selling Apple stock now, Berkshire could keep a larger portion of its capital gains than it would have if the tax rate had been higher. This explanation makes perfect sense, but there has to be more to this story.
A corporate tax hike would hurt stocks that were sold at a profit, but Buffett did not sell other long-term holdings such as American Express, Coca-Cola and Visa, and Chevron’s cut would be It was much lower than Apple. So what does he know (or suspect) about Apple that Wall Street has overlooked?
Warren Buffett knows valuation always matters
Apple is a great company with enviable brand authority. The company has a strong presence in several consumer electronics categories, and its foray into AI could be a big catalyst for this business. But Warren Buffett knows that valuation always matters, and Wall Street seems to be overlooking that fact with Apple’s concerns.
Analysts expect Apple’s profits to rise 9.4% annually over the next three years. Therefore, the current valuation of 35.2 times looks expensive. These numbers give the stock a price-to-earnings ratio (PEG) of 3.7x, which is above the three-year average of 2.6x. For context, a PEG ratio of less than 1 is considered cheap, while ratios between 1 and 2 are usually considered reasonable. However, if the PEG ratio approaches 4, it is almost certainly unsustainable.
Apple is scheduled to announce its fourth quarter fiscal 2024 financial results on October 31st. If management makes positive comments, the stock price could rise following this report. Either way, I think Apple stock is headed for a correction at some point, unless earnings increase significantly more than expected over the next few years.
American Express is an advertising partner of The Ascent, a Motley Fool. Trevor Jennewine has a position at Visa. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Chevron, and Visa. The Motley Fool has a disclosure policy.
