Why Warren Buffet Sold Apple (AAPL)?

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Apple (AAPL) was one of the few bright spots amongst some poor tech earnings last week.

Yet, financial pros became skittish as news hit the wire Warren Buffett had unloaded a massive amount of his holdings.

It sent search volume for the stock soaring through the weekend, according to our TrackStar data, as investors panicked.

Yesterday’s market rout didn’t do anything to alleviate those fears. 

Is this an opportunity to scoop up shares at a discount or will there be more selling in the future?

Apple’s Business

In a world increasingly dominated by artificial intelligence, Apple has thrown its hat into the ring with “Apple Intelligence.” This AI-powered system unveiled at the 2024 Worldwide Developers Conference, aims to revolutionize how users interact with their iPhones, iPads, and Macs. 

The impact would be huge since the company serves hundreds of millions of customers globally through its retail stores, online platforms, and third-party resellers. 

Apple segments its business into the following areas:

• iPhone (52.3% of total revenues) – Flagship smartphone product line
• Services (28.2% of total revenues) – Includes digital content, cloud services, and Apple Pay
• Mac (8.2% of total revenues) – Desktop and laptop computers
• iPad (8.3% of total revenues) – Tablet product line
• Wearables, Home and Accessories (9.4% of total revenues) – Includes Apple Watch, AirPods, and HomePod

In its latest quarterly earnings report, Apple posted revenue of $85.8 billion, up 5% year-over-year, beating analyst estimates. 

The company’s services segment continued its unstoppable ascent, eclipsing $24 billion in quarterly revenue on 14% growth. This strong performance in services has led to improved margins and robust cash flow generation.

However, not all news was positive. 

Apple experienced a slowdown in China revenues year-over-year in Q3, though it enjoyed growth in all other reportable regions. This comes amid increasing competition from local brands like Huawei.

But the real news came days later when Warren Buffett’s Berkshire Hathaway slashed its massive stake in Apple by nearly 50% in Q2. This reduction, from approximately 789 million shares to about 400 million, raised eyebrows given Buffett’s long-standing confidence in the tech giant.

Financials

Source: Stock Analysis

There’s been an odd juxtaposition between Apple’s revenue growth and share price in the past few years.

Shares are up 40% since 2022, while sales are pretty much flat.

However margins have expanded as the mix of sales shifted away from hardware and more towards software and services.

That’s helped keep the stock’s momentum in the face of slower sales in the key Chinese market.

Cash flow from operations still exceeds $113 billion annually, but that’s down from $122 billion in 2022.

With CAPEX of just $10 billion or less annually, the company spends nearly $115 billion annually on its dividend and share buyback, yielding around 3.4%.

In recent years, some of the money has been used to bring down the debt, which currently sits at just over $100 billion.

Valuation

Source: Seeking Alpha

With the recent pullback, Apple’s stock still trades at 32.8x forward earnings, not much cheaper than Nvidia (NVDA), yet with a fraction of the growth.

In fact, it trades at a higher price-to-cash ratio than Microsoft (MSFT) or Amazon (AMZN). It appears investors are willing to pay more for steady cash flow than growth.

Growth

Source: Seeking Alpha

Apple stands alone on this list for its single-digit revenue growth rate.

Even Tesla’s (TSLA) YoY revenue growth was better.

And most of the companies on this list saw free cash flow grow at much faster rates over the past three years.

Profitability

Source: Seeking Alpha

While Apple brings in a ton of cash from operations, Microsoft and Amazon generate more.

And although Apple’s margins are great, they aren’t the top in most categories.

Our Opinion 6/10

A lot of analysts are extremely bullish on Apple. We aren’t.

Don’t get us wrong, the company is amazing. But it doesn’t have the growth or profitability of others on this list.

In our opinion, there are simply better choices out there at the moment.

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