Berkshire Hathaway is reducing its hold on its top holding.
Apple (AAPL 0.93%) may be one of the best-performing stocks this century, but lately, the tech giant’s performance hasn’t been so stellar. Apple underperformed the S&P 500 by a wide margin so far this year as the stock’s price is up less than 1%, compared to a nearly 11% gain from the S&P 500.
While some of its big tech peers have surged over the past 18 months on excitement over artificial intelligence (AI), Apple seems to be getting left behind by the latest technology trend. Its quarterly results continue to show the company struggling to grow revenue, as the iPhone market that fuels the majority of its revenue continues to mature.
To add to its issues, Apple seems to be losing the support of its biggest backer. Warren Buffett’s Berkshire Hathaway (BRK.A 0.59%) (BRK.B 0.09%) cut its stake in Apple for the second quarter in a row in 2024’s first quarter. This time, Berkshire Hathaway sold more than 116 million shares of Apple, reducing its holdings by 13%. With the stock’s underperformance, its value in the Berkshire portfolio fell from more than 50% at the end of the fourth quarter to less than 41% at the end of the first.
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Is Buffett turning on Apple?
Warren Buffett is more open than most billionaire investors in talking about the stocks he buys and sells, but investors are still generally left guessing about Berkshire’s stock purchases and sales. At Berkshire’s annual shareholder meeting in early May, Buffett was asked about selling shares of Apple. In providing an answer, Buffett implied that the sale was related to possible changes in capital gains tax rates and wanting to lock in some of Berkshire’s gains.
While discussing the capital gains rate Buffett told shareholders at the meeting, “I’m doing it at 21% this year and we’re doing it at a little higher percentage later on, I don’t think you’ll actually mind the fact that we sold a little Apple this year.”
However, that might not explain the whole reason for Berkshire’s decision to cut its Apple stake. Buffett has raved about Apple as a business several times over the years, saying he thinks of it as Berkshire’s third business after its insurance business and its BNSF railroad. However, Berkshire also adjusts its holdings, and Apple’s recent earnings report may offer some explanation for why an investor would sell the stock.
Revenue in the fiscal 2024 second quarter fell 4% year over year to $90.8 billion as iPhone sales declined, and the company continues to face challenges in China. While the services business continues to grow, it’s not growing fast enough to sustain Apple’s prior growth strategy. The company needs product sales to return to growth. As growth slows, earnings per share (EPS) were essentially flat in the period and improved mostly because of large levels of share buybacks and the higher margins that the growth in services offers.
Is Apple’s economic moat narrowing?
One alternate explanation for Berkshire’s sell-off could be that the iPhone maker’s economic moat isn’t as strong as it once was. Apple isn’t facing a threat from a new competitor, but in many ways, the company competes with itself.
If the company is going to sell new smartphones and devices, they need to be measurably better than previous models to convince investors to keep buying them. The upgrade cycle, or the amount of time consumers wait to buy a new iPhone, has been getting longer, which is putting pressure on iPhone sales.
With the company expected to release its 16th-generation iPhone device later this year, there may be some consumer fatigue for the company’s trademark phone and a feeling among investors that it needs a new growth driver. Additionally, the company’s perceived lack of significant investment in AI could leave it standing in the shallows in the coming years, as peers like Microsoft and Alphabet seem to be jumping into the deep end when it comes to AI.
Finally, Apple stock is still expensive based on traditional metrics. It trades at a price-to-earnings ratio of 30, an especially high valuation for a company with declining revenue. Apple may eventually return to stronger revenue growth, but for now, the stock looks to be at risk of a pullback as the business is shrinking.
That may not be the actual reason Buffett sold Apple, but it’s not a bad reason for other current shareholders to sell the stock. Apple is struggling in its core business. It seems to have fallen behind in the AI race, and the valuation is pricey. Whether you’re Buffett or not, those are all good reasons to consider selling Apple stock today.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.