This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Berkshire Hathaway's sale of Apple isn't entirely unexpected, considering its prior sales.
- Interestingly, Berkshire put some of its war chest of capital to work, taking a new stake in another "Magnificent Seven" company.
- While many investors view large artificial intelligence stocks as overvalued, Berkshire purchased one of the cheaper names in the group, potentially following its longtime value-oriented strategy.
Due to the strong performance of Berkshire Hathaway's stock over many decades and to its leader, the legendary Warren Buffett, investors are always excited to get a glimpse at Berkshire's recent portfolio moves each quarter. Large funds are required to disclose changes to their portfolio no later than 45 days after the end of each quarter.
Even with Buffett set to step down at the end of the year, Berkshire is one of the strongest companies in the world and has an extraordinary team of investors. In the third quarter, Berkshire sold more of its stake in Apple and piled into another "Magnificent Seven" stock that trades at a fraction of Tesla's valuation.
Berkshire continues to offload its largest position
In Q3, Berkshire sold another 15% of its Apple shares, reducing its position to 238.2 million shares, which were valued at $60.6 billion at the end of the quarter. Apple remains Berkshire's largest equity holding, consuming 21% of Berkshire's massive $309 billion equities portfolio.
It shouldn't surprise investors too much to see Berkshire continuing to pare its Apple position. As Buffett said back in 2020 when Berkshire dumped all of its airline stocks during the pandemic, "When we sell something, very often it's going to be our entire stake: We don't trim positions. That's just not the way we approach it any more than if we buy 100% of a business. We're going to sell it down to 90% or 80%."
Investors must also realize, if they haven't already, that due to Berkshire's size, the company cannot enter and exit positions as easily as a retail trader on Robinhood. Its positions are so large that it takes time to build positions to the desired size, and conversely, it takes time to offload positions. Since the start of 2023, Berkshire has now slashed its stake in Apple by 74%, indicating that the large conglomerate is preparing for a full exit.
It's tough to pinpoint exactly when Berkshire started to sour on the company, but Apple has faced issues this year due to tariffs and what many investors perceive to be a lack of an artificial intelligence (AI) strategy. The stock has recovered from its losses earlier this year and is now performing well. Who knows, perhaps the company's decision not to invest as much in AI infrastructure may prove prudent, but investors at Berkshire seem to have made up their minds.
Initiating on this cheaper "Magnificent Seven" name
Berkshire's significant move came from the initiation of a new position in Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). The company purchased over 17.8 million shares, valued at more than $4.3 billion, at the end of Q3. The position consumes 1.6% of Berkshire's portfolio.
Alphabet has had an eventful year. Last year, a federal judge ruled that Google deployed monopolistic practices in its search and advertising business that violated antitrust law. The U.S. Department of Justice asked the courts to order Alphabet to divest its Google Chrome business as punishment. Chrome is a key component of Alphabet's large search business, and investors were concerned this might come to fruition.
Ultimately, though, the courts did not compel Google to do this. Furthermore, the federal judge in its ruling stated that Google could continue the practice of paying companies, such as Apple, tens of billions of dollars to use Google as their default search engine on the Safari browser. Investors hailed the ruling as a win for the company.
Investors have also been concerned about how AI chatbots like ChatGPT may impact Google's search business but have since been more satisfied with the performance of Google's overviews and AI Mode, giving them greater confidence in Google's ability to retain its leading 90% market share of the search market.
Buffett and the team at Berkshire are value investors at their core, meaning they seek to invest in companies trading at a discount to what Berkshire views as their intrinsic value. While many are wary of the red-hot and highly valued AI sector, Alphabet has traded at the bottom of the group in terms of forward price-to-earnings, with a valuation that is a fraction of Tesla's.
GOOG PE Ratio (Forward) data by YCharts.
It's easy to see why Berkshire is intrigued with Alphabet. The stock is cheap compared to peers, and the company runs several industry-leading businesses with high growth potential aside from search, including YouTube, WayMo's autonomous vehicle fleet, Google Cloud, and even its own chip business.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
