The Magnificent Seven is a group of megacap companies collectively worth about $13 trillion. They account for roughly one-quarter of the S&P 500 and more than one-tenth of all publicly traded stocks by market capitalization.
- Alphabet
- Amazon
- Apple (AAPL -0.35%)
- Meta Platforms
- Microsoft
- Nvidia
- Tesla
Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) owns just one Magnificent Seven stock. Under Warren Buffett's leadership, the company began buying Apple in the first quarter of 2016, and the stock has since become its largest holding. But Berkshire sold about 10 million shares of Apple in the fourth quarter, and Mizuho analyst Jordan Klein recently said he wouldn't be surprised to see the selling continue in 2024.
Here's what investors should know.
Berkshire Hathaway recently trimmed its position in Apple
Berkshire has only trimmed its position in Apple on six occasions since it began accumulating shares. The first sale took place in the fourth quarter of 2018. The next sales took place in the third and fourth quarters of 2019, followed by the third and fourth quarters of 2020. And the latest sale occurred in the fourth quarter of 2023.
That does not necessarily mean Warren Buffett has lost confidence in Apple. In fact, just last year he said Apple was a "better business" than any company Berkshire owned. I doubt his opinion is much different today. Despite the recent sale, Berkshire still had 43% of its $372 billion stock portfolio in Apple at the end of the fourth quarter. That signals high conviction.
Of course, as Jordan Klein at Mizuho suggested, Berkshire may have continued selling shares after the quarter ended. After all, many investors are worried about weak iPhone sales in China and the recent implementation of the Digital Markets Act (DMA) in Europe. For context, the DMA stipulates that digital platform operators must allow third-party app stores and alternative payment options on their devices, meaning it could hurt Apple's revenue.
As to whether Berkshire continued selling the stock, investors will have an answer no later than May 15. That is the date by which Berkshire must disclose first-quarter trading activities in a Form 13F filed with the SEC. In the meantime, investors should ask themselves if Apple is a worthwhile investment at its current price.
Apple benefits from brand authority and pricing power
Apple has an important advantage in brand authority, which itself is a product of engineering prowess. The company pairs appealing hardware with proprietary software to create a unique user experience that consumers find valuable, and that experience becomes increasingly compelling with more devices. Apple derives tremendous pricing power from that strategy. For instance, the average iPhone sold for three times more than the average Android smartphone last year, according to eMarketer.
Brand authority has helped Apple secure a strong presence in several consumer electronics verticals. Most notably, the company led the global smartphone market in shipments last year, but it also ranked first in tablet and smartwatch shipments, and fourth in personal computer shipments. Of course, consumers purchase hardware intermittently, so Apple has developed an ecosystem of adjacent services to more effectively monetize its installed base, which recently surpassed 2.2 billion devices.
With that in mind, Apple reported lackluster financial results in the first quarter of fiscal 2024, which ended Dec. 31, 2023. Revenue climbed 2% to $119.5 billion as solid momentum in services was offset by declining sales in the iPad and Wearables categories. Sales growth in the services segment was primarily driven by strength in advertising, streaming video, and cloud storage. Meanwhile, gross margin expanded 290 basis points and GAAP earnings jumped 16% to $2.18 per diluted share due to share buybacks and the growing importance of the high-margin services business.
The chart below provides more detail on first-quarter revenue growth across the five product categories.
Shown above is Apple's first-quarter revenue growth across five product categories. The first quarter of fiscal 2024 ended Dec. 31, 2023.
One potential problem not shown in the chart is that China sales fell 13% in the December quarter due to stiff competition. Worse yet, Counterpoint Research says that trend intensified during the first six weeks of 2024, with iPhone sales slipping 24% in China. Meanwhile, Huawei's sales surged 64%.
On the December earnings call, CEO Tim Cook told analysts he remains "very optimistic about China over the long term." But investors should monitor the situation. China accounts for about 17% of Apple's revenue, and the company is losing market share in the region.
Apple stock looks expensive compared to future growth prospects
Going forward, Grand View Research expects the consumer electronics market to grow at 6% annually through 2030. Meanwhile, mobile application sales are forecasted to increase at 14% annually, mobile wallet revenue is projected to grow at 28% annually, and digital ad spending is expected to compound at 15% annually during the same period.
I mention those last three markets because they represent particularly important opportunities for Apple. The App Store accounts for about one-third of services revenue, according to The Wall Street Journal. Apple also ranks among the fastest-growing digital advertising companies in the U.S., and Apple Pay is the most popular in-store mobile wallet among U.S. consumers.
With that in mind, Wall Street expects Apple to grow sales at 5.8% annually over the next five years, while earnings per share increase at 8.3% annually during the same period. Stronger bottom-line growth is based on two assumptions: (1) Services will continue to account for a greater portion of total revenue, and (2) Apple will continue to repurchase stock.
Even so, the current valuation of 27.4 times earnings looks expensive compared to Wall Street's consensus estimate. Additionally, flagging iPhone sales in China and the possibility that the DMA could hurt App Store sales in Europe introduce more uncertainty. For those reasons, I would personally avoid this stock right now, and I would consider trimming my position if I were a shareholder.
