Apple (NASDAQ: AAPL) may be one of the best-performing stocks of this century, but the tech giant’s performance hasn’t been great lately. Apple underperformed S&P500 by a wide margin so far this year, as the stock is up less than 1%, compared with a nearly 11% gain versus the S&P 500.
While some of its big tech peers have been excited about artificial intelligence (AI) over the past eighteen months, Apple appears to be falling behind the latest technology trend. The quarterly results continue to show that the company is struggling to grow revenue as the iPhone market, which generates the majority of revenue, continues to evolve.
To compound the problems, Apple appears to be losing the support of its largest backer. Warren Buffetts Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) The company reduced its stake in Apple for the second quarter in a row in the first quarter of 2024. This time, Berkshire Hathaway sold more than 116 million shares of Apple, reducing its holdings by 13%. The stock’s underperformance caused its value in the Berkshire portfolio to fall from more than 50% at the end of the fourth quarter to less than 41% at the end of the first quarter.
Will Buffett turn against Apple?
Warren Buffett is more open than most billionaire investors when it comes to the stocks he buys and sells, but investors are generally still left guessing about Berkshire’s stock purchases and sales. During Berkshire’s annual shareholder meeting in early May, Buffett was asked about selling Apple shares. In his response, Buffett suggested that the sale was related to possible changes in capital gains tax rates and that he wanted to capture some of Berkshire’s profits.
While discussing the capital gains rate, Buffett told shareholders at the meeting, “I’ll do it at 21% this year and we’ll do it at a little bit higher rate later. I don’t think you’ll mind us doing a sold a little bit of Apple.”
However, that might not explain the entire reason for Berkshire’s decision to reduce its stake in Apple. Buffett has spoken highly of Apple as a company several times in recent years, saying he views it as Berkshire’s third-largest company, after the insurance business and the BNSF railroad. However, Berkshire is also adjusting its holdings, and Apple’s recent earnings report may provide some explanation as to why an investor would sell the stock.
Second-quarter fiscal 2024 revenue fell 4% year-over-year to $90.8 billion as iPhone sales fell and the company continues to face challenges in China. While the services sector continues to grow, it is not growing fast enough to support Apple’s previous growth strategy. The company needs product sales to grow again. With growth slowing, earnings per share (EPS) remained broadly stable over the period and improved mainly due to large share buybacks and the higher margins offered by service sector growth.
Is Apple’s economic moat shrinking?
An alternative explanation for Berkshire’s selloff could be that the iPhone maker’s economic position is no longer as strong as it used to be. Apple isn’t facing the threat of a new competitor, but in many ways the company is competing with itself.
If the company is going to sell new smartphones and devices, they must be measurably better than previous models to convince investors to keep buying them. The upgrade cycle, or the amount of time consumers wait to buy a new iPhone, has gotten longer, putting pressure on iPhone sales.
With the company expected to launch its 16th generation iPhone later this year, there may be some consumer fatigue for the company’s signature phone and a sense among investors that it needs a new growth engine. Furthermore, the perceived lack of significant investment in AI could leave the company in the shallow water for years to come, as industry peers like Microsoft And Alphabet seem to be taking the plunge when it comes to AI.
Finally, Apple stock is still expensive by traditional measures. It trades at a price-to-earnings ratio of 30, an especially high valuation for a company with declining revenues. Apple may eventually return to stronger sales growth, but for now the stock appears to be at risk of retreat as the business shrinks.
That may not be the actual reason Buffett sold Apple, but it’s not a bad reason for other current shareholders to sell the stock. Apple is struggling in its core activities. It seems to have fallen behind in the AI ​​race, and its valuation is pricey. Whether you’re Buffett or not, these are all good reasons to sell Apple stock today.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Apple, Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Is this why Warren Buffett sold Apple stock? was originally published by The Motley Fool
