Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), known for its long-term investment strategy, has been aggressively selling its Apple (NASDAQ: AAPL) shares. In fact, the company run by Warren Buffett, the Oracle of Omaha, has sold more than 500 million shares during the first half of the year, or more than half of its holdings.
It’s always noteworthy when Berkshire Hathaway sells shares, but especially those of a company in which it held such a large stake. But that doesn’t mean you should necessarily hit the sell button. What’s right for Warren Buffett may not be the best course of action for you. Before making a decision, you should take a step back and examine Apple’s prospects.
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The importance of the iPhone
As usual, Apple’s iPhone accounts for the largest portion of its sales. The product generated 52% of the company’s year-to-date top line.
However, iPhone sales have been in a slump that includes a 1% decline in the fiscal third quarter, which ended on June 29. That’s due in part to lower-priced phones being sold in China, undercutting Apple’s pricey iPhones and stealing the company’s share of that very large market. Overall sales in that country dropped 6.5% in the quarter to $14.7 billion, which management claimed was mainly due to weak iPhone sales.
Its global market share, based on the number of shipments, has also been dropping. The iPhone share was 15.8% in the June 30 quarter, down 1.5 percentage points from March 31.
Soaring sales of services
Apple’s services business has been a bright spot in recent reports. It includes advertising, tech support, payment services, and the App Store.
In the latest quarter, services’ top line grew by more than 14%, to $24.2 billion. The business also generates a much higher gross margin than sales of products. Services’ 74% gross margin was more than double products’ 35.3%.
But the business has also raised flags with regulators. The U.S. Department of Justice and some state attorneys general allege Apple engaged in monopolization of the smartphone market. Their claims include the company “selectively imposing contractual restrictions” on app developers, cloud streaming services, and message apps, and limited the availability of digital payment options.
No one knows how this will play out, but it could take a while. That injects uncertainty into Apple’s fast-growing, high-margin service business.
Lofty valuation
Apple’s stock has performed well over the years. In the last year, the shares have gained 24.3%, besting the S&P 500 index by 2.6 percentage points.
However, the large appreciation also means a more expensive valuation. The price-to-earnings (P/E) ratio has increased from about 30 to 34. Over the last 10 years, the stock has a median P/E of 19. The current P/E is also higher than the S&P 500’s 28.
Certainly, the market expects Apple’s sales and profit to grow rapidly. While third-quarter sales accelerated, they still only grew 5%. The company will launch its new artificial intelligence feature when it releases the latest iPhone, but it’s unclear whether the free feature will significantly accelerate sales growth.
In the meantime, the shares sell at a premium valuation, while iPhone sales remain sluggish and a government antitrust complaint hangs over Apple’s head. The company is still a behemoth, but it’s not delivering market-beating growth anymore.
To me, that adds up to following Berkshire Hathaway’s lead and selling Apple shares. That could mean taking profits by trimming your Apple stake, as Buffett is doing, or selling the entire holding if you’re out of patience with Apple’s stalled growth.
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Lawrence Rothman, CFA 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.