Warren Buffett is undoubtedly one of the greatest investors of our time. The Omaha Oracle has accumulated a fortune in excess of $ 80 billion, placing it among the 10 richest people in the world.
His company, Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB), is a large conglomerate, with wholly owned subsidiaries in a wide range of sectors, providing much more revenue than its “core” insurance businesses. And, notoriously, it has an impressive stock portfolio that, as of December 31, was worth more than $ 281 billion. This portfolio was no small factor in helping Berkshire’s shares achieve an impressive annualized return of 20% since 1965, almost double that of the S&P 500annualized return of 10.2%.
Some investors may have been surprised when Buffett, averse to the technology industry, added Apple (NASDAQ: AAPL) shares for their holdings for about five years. Now, they may be equally surprised to learn that he recently sold 57 million shares of that stock. Given Buffett’s track record, prudent investors should ask themselves: is it time to sell Apple?
Image source: Getty Images.
Don’t bet against Apple
Apple is one of the biggest turnaround stories in the business world. After it was founded in 1976, its first desktop models revolutionized the personal computer industry, helping the company claim early leadership IBM and Microsoft. But its financial performance and social relevance declined after co-founder Steve Jobs left in 1985, and the company was on the verge of bankruptcy before its return in 1997.
Go 24 years ahead – through innovations like the iMac, iPod, iPhone, iPad and more – and today Apple is one of the largest companies in the world, with a market capitalization of more than $ 2 trillion. In addition, it ranks second in global market share for smartphones and desktop operating systems, and the iPad is the world’s leading tablet.
More importantly, Apple is still an innovative and adaptable company. In recent years, it has put an increasing level of focus on services such as digital payments and subscription products (Apple TV +, Apple Arcade, Apple Music and others). This strategy is allowing the company to further monetize its huge user base. In the last quarter, there were more than 1.65 billion active Apple devices in the hands of customers.
Regarding physical products, I think Apple still has some tricks up its sleeve. He has been working on a number of augmented and virtual reality (AR / VR) projects, and rumors suggest that his first AR and VR headsets may be ready for release in the quarter this year. He is also designing an electric vehicle. Any of these efforts could lead to important new market opportunities for the tech giant.
Also, consider Apple’s strong financial performance over the past decade. Few companies have been able to increase revenue or free cash flow so quickly and consistently.
|
Metric |
2010 |
T1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Recipe |
$ 65.2 billion |
$ 294.1 billion |
15.8% |
|
Free cash flow |
$ 16.6 billion |
$ 80.2 billion |
16.6% |
Source: Apple SEC files. CAGR: compound annual growth rate. Note: 1st quarter of 2021 ended on December 31, 2020.
Finally, its return on invested capital (ROIC) was 34% in its last fiscal quarter, which means that the company earned $ 0.34 for every $ 1 invested in its business. By comparison, the ROIC for the S&P 500 as a whole was 7% in November 2020. This means that Apple uses capital much more efficiently than the average company – evidence of a well-run business.
Why did Buffett sell Apple?
In Buffett’s letter to shareholders in 1988, he said the famous phrase: “When we have excellent shares of business with exceptional management, our favorite share period is forever.” I believe Apple checks these two boxes, so why did Buffet sell?
Although I can’t say for sure, one possibility is that Berkshire’s stake in Apple has grown so much that Buffett felt uncomfortable. Before the recent sale, Apple accounted for almost 48% of the value of Berkshire’s stock portfolio. This level of concentration carries a significant risk, and it is possible that Buffett considered it prudent to reduce the position.
Regardless, I don’t think that Buffett’s decision should worry investors at all. Berkshire still owns 887 million shares of Apple, which today are worth more than $ 117 billion. For two even more compelling statistics, Buffett owns more than 5% of Apple’s outstanding shares, and the investment still accounts for almost 44% of Berkshire’s portfolio. This represents a great vote of confidence from one of the largest investors in the world.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.