Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) has amassed a record cash reserve, surpassing $325 billion by the end of the third quarter. Under the leadership of Warren Buffett, the company has been steadily reducing its equity holdings, resulting in this cash pile.
While this doesn’t suggest a direct bet on the stock market’s direction, it does indicate that Buffett is exercising greater caution in his investment approach, especially as the market continues to reach new highs. As Buffett often advises, "Be fearful when others are greedy, and greedy when others are fearful," signaling that he may be waiting for a more opportune time to deploy capital.
Berkshire Hathaway’s largest source of cash generation this year has been Apple stock (NASDAQ: AAPL), a stock Warren Buffett has been steadily reducing. In the third quarter, Buffett sold additional shares, bringing the company's stake down to an estimated 300 million shares, valued at about $69.9 billion. Earlier in the year, Berkshire had sold roughly 400 million shares, cutting its position by nearly half.
Despite these sales, Apple’s stock has continued to rise, gaining around 25% over the past 12 months. This performance raises the question for other investors: Is now the right time to trim positions in the tech giant? Let's take a closer look at whether it makes sense to sell Apple stock from your portfolio at this point.
Apple reported its Q4 and full fiscal 2024 earnings at the end of October, showing a return to revenue growth. The company’s quarterly revenue rose 6% year-over-year, reaching $95 billion, driven by strong iPhone sales and the growth of its highly profitable software services division. For the full fiscal year, software services revenue totaled $96 billion, a significant increase from $85 billion in the previous year. Despite this growth, concerns around slow revenue expansion and potential antitrust risks continue to loom over the company.
While Apple posted strong growth in the most recent quarter, its overall revenue performance has been underwhelming compared to other major tech companies in recent years. Despite the quarterly 6% increase, Apple’s revenue and free cash flow remain below their mid-2022 peaks. In contrast, peers like Alphabet, Amazon, and Microsoft have consistently delivered faster, more robust revenue growth over the same period. This slowdown in revenue growth could be a key reason behind Warren Buffett’s decision to significantly reduce his Apple stake.
The iPhone continues to deliver strong results for Apple, but other product categories have struggled. Sales of the iPad and wearables (such as watches and headphones) declined last fiscal year, despite being newer product lines. Perhaps most concerning is the flop of Apple's Vision Pro. Launched with high expectations, the mixed-reality headset has failed to gain traction, with minimal adoption and significant losses for the company.
Another factor that may weigh on Buffett’s decision-making is the ongoing antitrust scrutiny of the lucrative deal between Apple and Alphabet. Google pays Apple an estimated $20 billion annually to keep its search engine as the default on Apple devices. However, the government is currently reviewing whether this arrangement violates antitrust laws. If the courts rule against the deal, Apple could lose a significant chunk of its profits, potentially wiping out $20 billion in annual earnings—about 16% of its operating income for the year.
Apple presents a mix of opportunities and risks. The iPhone and software services continue to drive stable earnings, but there are potential downsides, including weaker demand for some of its newer products and the looming antitrust lawsuit involving Google Search. However, these concerns likely don’t play a major role in Buffett’s decision-making. As he has often stated, he believes Apple enjoys a wide economic moat thanks to its powerful brand and the high switching costs for customers tied into its ecosystem of hardware and services.
The main reason Buffett has reduced his Apple position likely comes down to valuation. With a price-to-earnings (P/E) ratio of around 36, Apple is trading at a high multiple for a company experiencing slower growth. When Buffett first bought Apple, its P/E was between 10 and 15. Earlier this year, Buffett also noted that rising corporate tax rates in the U.S. might further weigh on companies’ valuations, especially considering the government’s growing deficit.
Should you follow Buffett and trim your Apple holdings? If Apple represents a large portion of your portfolio, similar to how it once made up over 50% of Berkshire Hathaway's stock holdings, it may make sense to trim your position given the inflated earnings multiple. However, Apple still has a powerful competitive advantage and a globally recognized brand. As long as these factors remain intact, there's no need to completely exit your position.
In summary, while trimming a large position might be prudent in the current market, there’s no rush to part with Apple entirely—its fundamentals continue to support long-term potential.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
