Investors are faced with a pivotal choice as Apple (AAPL) approaches historical highs, especially with a notable shareholder exiting their position.
Apple (AAPL -0.33%) has just wrapped up its fiscal year 2024 with the release of fourth-quarter earnings, but the market’s reaction has been largely indifferent. While the stock has dipped a few percentage points following the earnings announcement, this decline isn’t alarming. Over the past year, Apple has impressively returned 25% to its shareholders, a strong performance for a company boasting a staggering $3.3 trillion market capitalization.
Complicating the landscape is the fact that one of Apple’s most significant investors, Berkshire Hathaway, also disclosed earnings recently. Under the leadership of the esteemed Warren Buffett, Berkshire has continuously reduced its holdings in Apple; what once valued at over $170 billion has now decreased to merely $66 billion.
Though investors must make independent decisions, it’s hard to ignore the influence of Buffett’s presence in the financial world. His company’s stock moves invariably lead individual investors to reconsider their own strategies regarding buying, selling, or holding Apple stocks.
It’s important to note that Berkshire’s rationales for liquidating portions of its Apple portfolio may not align with your investment strategy. In this piece, I will explore the implications of Berkshire’s divestment, the critical factors influencing Apple’s stock, and whether now is the right time to buy, sell, or hold shares as we move forward into 2025.
Selling Apple makes sense for Buffett, and why it probably doesn’t matter to you
Berkshire Hathaway’s decision to offload more than half of its Apple stock is noteworthy, yet it doesn’t imply that Buffett’s confidence in Apple’s potential is waning. Buffett has consistently lauded Apple, labeling it a superior business compared to both American Express and Coca-Cola, long-standing fixtures in Berkshire’s investment portfolio.
The increase in Apple’s stock value since Buffett first acquired shares should also be taken into account. Specifically, the company’s price-to-earnings (P/E) ratio has experienced a steady rise over the last eight years, marking a significant transformation in its market standing.
Given this context, it’s plausible that the rationale for Buffett’s decision to trim Berkshire’s Apple holdings reflected both market strategy and fiscal prudence. Earlier this year, Apple had constituted nearly 20% of Berkshire’s total market capitalization. With Berkshire itself being a billion-dollar holding company with diverse private and public interests, concentrating so much equity in a single asset can be perilous.
Therefore, capitalizing on profits during a peak was a judicious move for Buffett. Despite this perspective, it’s important not to let Berkshire’s actions disproportionately sway personal investment decisions regarding Apple.
Explaining Apple’s higher valuation
While it’s clear that Apple is trading at much higher prices than it was a decade ago, the evolution of its business model warrants this elevated valuation. The proliferation of iOS devices, chiefly the iPhone, has resulted in a vast customer base that facilitates highly lucrative subscription services. In fact, revenues from these services accounted for approximately 24.5% of Apple’s total sales in 2024, a notable increase from the previous year’s 22.2%.
By enhancing service offerings and streamlining its supply chain, Apple has evolved into a more efficient enterprise, achieving a significantly higher return on invested capital (ROIC). This development helps rationalize the company’s enhanced valuation, highlighting its growth and adaptability.
Given these dynamics, it’s unlikely that Apple stock will regress to trading at merely 12 times earnings unless there’s a major downturn across the market sectors.
Is Apple a buy, sell, or hold?
Yet, this elevated efficiency does not imply that Apple’s stock is presently a bargain. The company has unlocked the capacity to generate more revenue with less investment; however, it’s crucial that the stock’s valuation remains congruent with anticipated earnings growth.
Exciting developments on the horizon include Apple’s introduction of Apple Intelligence, a suite of artificial intelligence features integrated into iOS 18, aimed at encouraging device upgrades. In the fourth quarter, Apple reported year-over-year revenue growth of 6%, though it has projected only low- to mid-single-digit growth for the upcoming quarter. This outlook must be taken with caution, as it is still early days for Apple Intelligence, having debuted just weeks ago, and the full impact on the company’s performance will take time to manifest.
During the 2024 fiscal year, Apple achieved earnings of $6.08 per share, with analysts forecasting a 21% growth in earnings per share to $7.40 for fiscal year 2025 (ending September 2025), and a subsequent increase of 11% to $8.25 for the following year. Over the next three to five years, analysts predict that Apple’s earnings will grow at an annual rate of roughly 12%. While the company merits a premium valuation due to its business quality, the current PEG ratio of about 3 suggests that Apple’s stock might be priced a bit too high in relation to its anticipated earnings growth.
Ultimately, Apple’s strong position in the market makes it an unwise choice to sell. Still, potential investors may be better off awaiting a more favorable valuation or greater clarity on Apple’s growth trajectory before considering a new purchase. For now, it’s prudent to categorize the stock as a hold.
American Express is an advertising partner of Motley Fool Money. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
**Interview with Jane Doe, Market Analyst at XYZ Investments**
**Interviewer:** Thank you for joining us today, Jane. Let’s dive right into the recent actions of Warren Buffett and Berkshire Hathaway regarding their stake in Apple. Can you tell us what your initial thoughts are on Buffett’s decision to reduce his Apple holdings?
**Jane Doe:** Thank you for having me! Warren Buffett’s decision to sell off a significant portion of Berkshire Hathaway’s Apple stake is indeed noteworthy. While it appears concerning on the surface—especially as Apple approaches historical highs—it’s essential to understand that Buffett has praised Apple’s business model for years. His sell-off might not necessarily reflect a lack of confidence in Apple itself; rather, it could be a strategic move to rebalance his portfolio.
**Interviewer:** That’s an interesting perspective. With Apple having recently released its fiscal year 2024 fourth-quarter earnings, how did the market respond, and what does this indicate moving forward?
**Jane Doe:** The market’s reaction to Apple’s earnings was relatively subdued. While we saw a slight dip in stock price, a 25% return over the past year is impressive, especially for a company with a market cap of $3.3 trillion. This stock volatility can often be attributed to the market digesting the news rather than a reflection of Apple’s underlying business health. Investors are likely weighing the potential for continued growth against this peak valuation.
**Interviewer:** Given Berkshire’s reduction of its Apple holdings from over $170 billion to $66 billion, should individual investors be concerned about their Apple investments?
**Jane Doe:** It’s natural for individual investors to feel uncertain in light of Buffett’s decisions. However, it’s crucial to evaluate your own investment strategy independently. Just because Buffett is trimming his holdings doesn’t mean that Apple is not a good investment for everyone. He operates on a scale and risk profile that differs greatly from individual investors. Besides, Berkshire’s rationale could be linked to broader diversification strategies rather than a direct indictment of Apple’s potential.
**Interviewer:** That’s a good point. How do you see Apple strengthening its business model, especially with a growing emphasis on subscription services?
**Jane Doe:** Absolutely. Apple’s evolution has been remarkable; it has shifted towards a model that capitalizes on recurring revenue streams through its services. The increase from 22.2% to 24.5% of total sales coming from services in just one year underscores this shift. This not only stabilizes revenue but also enhances profitability, providing a strong argument for its sustained high valuation.
**Interviewer:** As we look towards 2025, what would your advice be for investors regarding Apple stocks?
**Jane Doe:** Given the current landscape, I would suggest a cautious approach. Apple has demonstrated resilience and adaptability, but the stock is trading at a premium. It’s essential to align any investment decisions with one’s risk tolerance and investment horizon. Investors might consider holding their shares while monitoring the market closely for any significant downturns that could present a buying opportunity.
**Interviewer:** Thank you, Jane, for sharing your insights on this crucial topic. Your perspective is invaluable as investors navigate these dynamic market conditions.
**Jane Doe:** Thank you for having me! It’s always a pleasure to discuss these impactful trends in the market.
