Apple, Inc. is a Huge Success
By any measure—by every measure, almost—Apple, Inc. is a fabulous success. Its market cap is north of $3.5 trillion, making it the world’s largest company, over $400 billion larger than number two, Microsoft, and more than 50% bigger than Alphabet (Google). Apple’s revenues in 2023 amounted to over $380 billion. If Apple were a country, its GDP would be the 7th largest in the world. It represents more than 7.5% of the S&P 500’s total value.
Apple’s share of the global smartphone market was 52% in the first quarter of this year, making it the biggest player but by no means a monopoly. And the iPhone represented just over 50% of the company’s revenues in the second quarter, so Apple’s revenues are diversified across many lines, including laptops, desktops, wearables, and services. As of August 28th, Apple shares are up over 20% so far this year.
All this begs the question: Is Apple a buy or a sell right now? A check-in on the analysts following Apple shows 11 rating it “strong buy,” 21 rating it “buy,” and 6 rating it “hold.” None have it either “underperform” or “sell.” Apple stock is hot and seems to have shrugged off Berkshire’s big sale.
There Is More to the Story
Warren Buffett is famous for going against the grain, suggesting that “it’s wise for investors to be fearful when others are greedy, and to be greedy only when others are fearful.” That advice may be the single most difficult challenge for investors, who are often subject to panic selling and FOMO buying.
Taking his own advice has worked out wonderfully well for Buffett and his company, Berkshire Hathaway, Inc. Berkshire has returned an average annual gain of 19.8% from 1965 to 2023, suffering only 11 down years. This is more than double the 9.9% return of the S&P 500 in the same period. That works out to a return of 3,738,464% for Berkshire versus 24,709% for the market.
It’s pretty easy to get lost in percentages, so look at it this way: $10,000 invested in Berkshire in 1965 would be worth $373.8 million by the end of 2022, compared with $2.48 million if invested in the S&P 500. Buffett has earned his reputation.
Apple has been a star in the Berkshire Hathaway portfolio since 2016 when it made its initial investment. The stock traded in the $20 to $30 range that year, while in August of this year, it traded above $230. Over the past five years, Apple stock has gained 366%, versus just 95% for the S&P 500. But, Apple may have actually grown too far, too fast for Berkshire, and trimming the holding makes sense for many reasons (if you can call selling five hundred million shares a “trim.”)
If Berkshire had not sold Apple this year, its stake would have been nearly $200 billion at the end of June. That would mean Apple would have been over 22% of Berkshire’s total market cap of about $890 billion. That would be considered a significant overweight in any asset in any diversified portfolio.
Consider that Berkshire held a huge cash position, $277 billion, as of June 30. As of August 23rd, after all the sales earlier this year, Apple still accounted for 28.8% of Berkshire’s total stock portfolio. This is more than three times larger than its second-biggest position in American Express. This is a huge level of conviction in Apple stock.
Fear, Greed, or Something Else?
So what’s the answer? Is Buffett fearful that Apple has reached a FOMO (fear of missing out) point and is overvalued? Or does holding nearly 30% of his stock portfolio in a single stock indicate greed on his part?
On the fearful side, we have valuation. When Berkshire made its initial buy, Apple was trading at about 10 times earnings, but today it’s trading at about 30 times. A P/E of 30 translates into a 3.3% yield. That’s not crazy, and we should consider that the S&P 500 is trading at over 27 times.
On the greedy side, Apple may well be undervalued. Consider the potential of AI: Apple is investing billions of dollars annually in artificial intelligence. It has filed over 500 AI-related patents in the past five years and has spent over $3 billion acquiring more than 20 AI-related companies. They just need one of those patents, one of those companies, or just one of its innovations to have birthed another Google.
And speaking of Google, Apple is developing a search engine code-named “Pegasus” that it hopes will eat into Google’s huge market share. The federal government may make that easier for Apple with its antitrust lawsuit against Google. Global search revenues were over $200 billion in 2023, so this could be huge.
Business isn’t just fear and greed; it’s also finance. There are proposals to raise corporate taxes and to essentially eliminate long-term capital gains. It may be very smart for Apple to realize its most substantial gains while it knows what the tax bill will be. We can’t be sure whether fear or greed motivated Berkshire’s move this year, but we can take it to the bank that they have modeled the tax implications of sell vs. hold to the dollar, if not the penny.
A final thought. Investors should demonstrate high conviction toward a stock only based on what the underlying company will do in the future, not on its past glory. You can ask the investors who bought Peloton at Christmas time in 2020 at the $160 level. Peloton is a fine company that delivers on its promises, but it’s trading below $5 as of August 29th.
Disclosure: Financial Gravity Family Office Services recommends Apple, Inc. stock to certain of its investors.
