Warren Buffett is undoubtedly one of the greatest investors of our time. The Oracle of Omaha has amassed a fortune of more than $ 80 billion, placing it among the ten richest people in the world.
His company, Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB), is a massive conglomerate, with wholly owned subsidiaries in a wide range of industries that generate far more revenue than its “core” insurance companies. And it is known that it owns an impressive portfolio of stocks that was worth more than $ 281 billion as of December 31st. The portfolio was not a small factor in Berkshire’s share since 1965 achieving an impressive annual return of 20%, almost double the S&P 500annual return of 10.2%.
Some investors may have been surprised when the tech-savvy Buffett added appeal (NASDAQ: AAPL) about five years back in his possession. Now they may be equally surprised to learn that he recently sold 57 million shares of the stock. Given Buffett’s record, prudent investors should ask themselves: is it time to sell Apple?
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Do not bet against Apple
Apple is one of the biggest turnaround stories in the business world. Founded in 1976, its early desktop models revolutionized the personal computer industry, helping the company gain an early edge IBM and Microsoft. But its financial performance and social importance declined after Steve Jobs, the co-founder in 1985, left, and the company was on the verge of bankruptcy before his return in 1997.
Fast forward 24 years – 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 over $ 2 billion dollars. On top of that, it ranks second in the world share for smartphone and desktop operating systems, and the iPad is the leading tablet worldwide.
More importantly, Apple is still an innovative, adaptable company. In recent years, it has established an increasing focus on services such as digital payments and subscriber products (Apple TV +, Apple Arcade, Apple Music and others). With this strategy, the company can further earn its massive user base. Last quarter, there were more than 1.65 billion active Apple devices in the hands of customers.
As for the physical products, I think Apple still has a few tricks up its sleeve. Various augmented and virtual reality (AR / VR) projects are being worked on, and rumors suggest that the first AR and VR headsets will be ready by this year’s holiday quarter. It is also believed to be designing an electric vehicle. Any of these efforts could lead to huge new market opportunities for the technology giant.
Think also of Apple’s strong financial performance over the past decade. Few companies have managed to increase revenue or free up cash flow so quickly and consistently.
|
Metrics |
2010 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Income |
$ 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: Q1 2021 ended December 31, 2020.
Finally, its return on invested capital (ROIC) was 34% in its last fiscal quarter, meaning the company earned $ 0.34 for every $ 1 invested in its business. By comparison, the ROIC of the S&P 500 as a whole was 7% from November 2020. This means that Apple is using capital much more efficiently than the average company – proof of a well-run business.
Why did Buffett sell Apple?
In Buffett’s letter to shareholders in 1988, he famously said, “If we own portions of outstanding companies with outstanding management, our favorite holding period is forever.” I believe Apple is checking both the boxes, so why did Buffet sell?
While I cannot say for sure, one possibility is that Berkshire’s interest in Apple became so large that Buffett was uncomfortable. Prior to the recent sale, Apple represented nearly 48% of the value of Berkshire’s equity portfolio. The level of concentration poses a significant risk, and it is possible that Buffett considers it prudent to adorn the position.
Either way, I do not think Buffett’s decision should worry investors at all. Berkshire still owns 887 million shares of Apple, which today is worth more than $ 117 billion. For two more compelling statistics, Buffett owns more than 5% of Apple’s outstanding shares, and the investment still represents nearly 44% of Berkshire’s portfolio. This amounts to a large vote of confidence from one of the largest investors in the world.
This article represents the opinion of the author, who may not be in agreement with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! Questioning an investment thesis – even one of our own – helps us all to think critically about investments and to make decisions that help us become smarter, happier and richer.