Warren Buffett is undoubtedly one of the greatest investors of our time. The Oracle of Omaha has amassed a fortune in excess of $80 billion, placing him among the 10 richest people in the world.
His company, Berkshire Hathaway (BRK.A -0.43%) (BRK.B -0.42%), is a massive conglomerate, with wholly owned subsidiaries in a wide range of industries providing far more revenue than its "core" insurance businesses. And famously, it owns an impressive portfolio of stocks that, as of Dec. 31, was worth over $281 billion. That portfolio has been no small factor in helping Berkshire's stock achieve an impressive annualized return of 20% since 1965, nearly double the S&P 500's 10.2% annualized return.
Some investors may have been surprised when the tech-sector-averse Buffett added Apple (AAPL -0.32%) stock to his holdings about five years back. 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 greatest turnaround stories in the business world. After it was founded in 1976, its early desktop models revolutionized the personal computer industry, helping the company claim an early lead over IBM and Microsoft. But its financial performance and social relevance waned after co-founder Steve Jobs left in 1985, and the company was on the brink 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 cap of over $2 trillion. Moreover, it ranks second in global market 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 put an increasing level of focus on services like digital payments and subscription products (Apple TV+, Apple Arcade, Apple Music, and others). This strategy is allowing the company to further monetize its massive user base. Last quarter, there were more than 1.65 billion active Apple devices in the hands of customers.
On the physical products front, I think Apple still has a few tricks up its sleeve. It has been working on various augmented and virtual reality (AR/VR) projects, and rumor suggests that its first AR and VR headsets could be ready to launch by this year's holiday quarter. It is also reportedly designing an electric vehicle. Any of these efforts could lead to major new market opportunities for the tech giant.
Consider, too, Apple's strong financial performance over the last decade. Few companies have managed to grow revenue or free cash flow so quickly and consistently.
|
Metric |
2010 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$65.2 billion |
$294.1 billion |
15.8% |
|
Free Cash Flow |
$16.6 billion |
$80.2 billion |
16.6% |
Source: Apple SEC Filings. CAGR: compound annual growth rate. Note: Q1 2021 ended Dec. 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% as of November 2020. This means Apple uses capital far more efficiently than the average company -- evidence of a well-managed business.
Why did Buffett sell Apple?
In Buffett's 1988 letter to shareholders, he famously said: "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." I believe Apple checks both of those boxes, so why did Buffet sell?
While I can't say for certain, one possibility is that Berkshire's stake in Apple had grown so large that Buffett was uncomfortable. Prior to the recent sale, Apple represented nearly 48% of the value of Berkshire's stock portfolio. That level of concentration comes with significant risk, and it's possible Buffett felt it prudent to trim the position.
Regardless, I don't think Buffett's decision should worry investors in the slightest. Berkshire still owns 887 million shares of Apple stock, 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 represents nearly 44% of Berkshire's portfolio. That amounts to a big vote of confidence from one of the world's greatest investors.
