This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Apple's steep valuation and low growth prospects are reasons investors should avoid the stock.
- The possibility of higher corporate and capital gains taxes in the future might have driven Buffett’s selling moves.
- Greg Abel, Berkshire’s next CEO, has monster cash reserves to build his own investing legacy.
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) first purchased shares in Apple (NASDAQ: AAPL) more than nine years ago in the first quarter of 2016. Warren Buffett, who oversees capital allocation decisions for the conglomerate, realized that Apple was a powerful and durable consumer brand. That investment has worked out quite well, as the "Magnificent Seven" stock is up 766% since the start of 2016 (as of Aug. 26).
However, the Oracle of Omaha has seemingly become less bullish. Since Q4 2023, Berkshire has sold 635 million shares of Apple, with sales happening in five of the past seven quarters. Just in this year's Q2, 20 million shares were divested. The current Apple stake is valued at $64 billion, representing 21.4% of Berkshire's portfolio.
Apple remains the largest single position for the Buffett-led business, as it owns 280 million shares of the tech giant. But what's the deal with these recent moves?
Apple isn't a no-brainer opportunity
One possible reason for the significant reduction in the Apple position could come down to the simple fact that this is no longer a home run investment opportunity. When Berkshire first started buying shares nearly a decade ago, Apple shares traded at a much cheaper valuation. This is no longer the case, with the stock selling for a price-to-earnings (P/E) ratio of 34.6, well above its trailing five- and 10-year averages.
Of course, this is one of the world's greatest businesses. As a result, it's easy to argue that Apple deserves that valuation. However, Buffett probably doesn't see the potential to achieve strong returns from this point forward.
Apple's growth has slowed. To be fair, it did register a 9.6% year-over-year revenue gain in Q3 (ended June 28). But that pace isn't sustainable. Apple's sales were up just 13.4% from the same period exactly three years ago. It's difficult to expand meaningfully from such a high revenue base, while also selling hardware devices that are already widely adopted.
Anticipating potential tax changes
Buffett has been a leader in the business and investing worlds for decades. Because of this, and demonstrated by his incredible success, he's perhaps in tune with the landscape more than anyone else. The Apple share sales could have something to do with the Oracle of Omaha's view that changes will come to tax policy in the future.
It's hard to predict how different presidential administrations will alter the tax code. Buffett might be on to something, though. The U.S. federal debt sits at an alarming $36 trillion, as it has soared since the Great Recession. And the government operates with huge fiscal deficits. There is really no end in sight to this trend.
It makes sense to believe that taxes could be increased to fund the government. The current corporate tax rate is 21%. On a historical basis, this is extremely low. Additionally, the capital gains tax could also rise in the future.
Taking sizable profits off the table before Uncle Sam potentially demands more money looks like a smart move on Buffett's part.
Getting ready for Greg Abel
Berkshire has been a net seller of stocks. As someone who prioritizes investing with a margin of safety in his decision-making process, Buffett might not only be concerned about Apple's P/E multiple but also the valuation of the overall market. This could explain Berkshire's monster $344 billion cash position.
Buffett is set to retire as CEO at the end of this year. He could be making these moves to give his successor, Greg Abel, more financial firepower to play with. Apple is arguably the Oracle of Omaha's best investment decision. Now he wants Abel to build his own legacy.
It might be a good idea for Apple shareholders to think deeply about the reasons Berkshire and Buffett have been selling Apple. Perhaps it's a good time to follow these moves.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
