Buffett May Have Made a Big Mistake with Apple (AAPL) Stock

view original post

Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B) has remained on elf the largest shareholders in Apple (NASDAQ:AAPL) for roughly a decade. This relationship has evolved over the years, but has mostly involved buying activity from the Oracle of Omaha, up until recently.

Buffett has long praised Apple and its management team, touting this company as one of the true gems within the tech sector. Notably, Warren Buffett has traditionally been an investor that’s steered clear of companies that he claims are outside his “circle of competence,” though Apple’s consumer discretionary business model appears to be one he can understand reasonably well.

So, when Buffett started offloading his Apple stake, selling around half his stake in mid-2024, investors began to take notice. Typically, Warren Buffett has a pretty good handle (well, as good a handle as any investor can reasonably be expected to have) on companies’ valuations and when they make sense and when they don’t. One of his famous sayings is to be greedy when others are fearful and fearful when others are greedy, so perhaps the pervasive greediness of the overall market has him spooked.

That said, Buffett’s decision to offload a significant portion of his stake in Apple this year has cost Berkshire Hathaway big time. And while Buffett is certainly earning plenty of income via his portfolio of Tresurys his cash is parked in, that’s no match for Apple’s return of around 18% over the past six months alone.

Let’s dive into why this decision to sell may have been ill-timed, and if Apple can continue to ride this wave of momentum through 2025.

Key Points About This Article:

• Apple has been among the best-performing stocks this year, and has skyrocketed in value despite selling pressure from the likes of Warren Buffett and others.
• Let’s dive into the bull case behind Apple, and why these big sales could be proven to have been ill-timed by the Oracle of Omaha.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Incredible Rally Supported By Boosted Growth Expectations

Now, it’s true that trees don’t grow to the sky, and at some point, value investors may balk at a company’s valuation after what has been an incredible run. Buffett began accumulating Apple stock roughly a decade ago, so this has certainly been a long-term holding for him. And he’s still one of the largest investors in Apple (and likely will be if he continues to trim this position). 

But the reality is that the market can often stay irrational much longer than many investors can stay solvent (or have larger waves than some investors have the patience to ride out). In this case, overall market momentum driven by a new Trump administration in concert with an improved revenue and earnings growth forecast for Apple appears to be what’s driving this recent move.

The company’s surge to a new all-time high and the title of the world’s most valuable company (once again) with a valuation of around $3.8 trillion appears to be due in part to the company’s recent results. Despite overvaluation concerns, Apple’s Q4 revenue reached $94.9 billion, driven by 6% iPhone sales growth. Apple plans a $1 billion Indonesian manufacturing facility and uses Amazon’s new AI servers. Accordingly, it should be no surprise that a number of analysts have moved their growth targets higher for the company over time, particularly if the company’s upcoming iPhone launch goes as planned and Apple Intelligence (the company’s key software integration this year) pans out as bulls expect.

We’ll have to see whether AI can be a meaningful growth driver for Apple, but right now the market appears to be pricing in a much higher growth rate over time (which has been around zero for the past few quarters). Given Apple’s size, any notable uptick in growth (particularly on the bottom line) could drive even higher prices assuming multiples stay high.

Why Berkshire Is Trimming Apple

Apple has become among the most dominant global tech brands, and continues to dominate as one of the world’s leading consumer discretionary brands. The key thesis around Apple having a massive moat (or durable competitive advantage) and a world-class brand are key elements of Warren Buffett’s initial decision to begin investing in Apple in 2016. However, when the Oracle of Omaha began picking up shares, it’s worth noting that shares of Apple were trading hands around 10.6-times per share. 

Today, that multiple is closer to 30-times, so from a valuation perspective, there’s clearly less of an incentive for value-conscious investors to view Apple as a bargain here. Buffett may not have the view that Apple is overvalued per se at current levels, but his view of the market’s recent enthusiasm as likely being overblown has been noted in some of his recent commentary at his annual meeting when he explained the rationale behind some of these sales.

It’s also worth noting that Buffett talked about taking a tax hit now, when tax rates are relatively low, rather than waiting to see what the future will hold. His view that corporate tax rates may rise due to the size of the deficit has been directionally wrong, but that could change. However, under a Trump administration (which has positioned itself as a low-tax administration), we’re unlikely to see higher rates at least for the next four years. Accordingly, perhaps some of this bet was made on the Democratic Party winning another election and pushing for tax increases. We’ll never know.

Analysts Remain Positive on Apple

Apple’s rise this year has been truly remarkable, and now Apple is within a move of around 10% from becoming the first company to break through the $4 trillion valuation mark. We’ll have to see if the company can indeed hit this level. But with shares trading around $250 apiece at the time of writing, and Morgan Stanley’s Erik Woodring maintaining a buy rating with a $273 target, there are some in the market who believe that a $4 trillion valuation could certainly be possible int he coming year.

Again, time will tell if analysts are right on this call. But for now, given the company’s recent momentum and potential earnings bump in 2025, this is clearly a stock to watch. I think the key for investors (and analysts being correct in their call) will be if Apple can continue to see strong growth driven by its recent AI endeavors. If this is the case, it’s possible Apple’s valuation could rise without multiple expansion, but in recent years, the story has mostly been a multiple expansion one.

Is Apple Stock a Buy?

Warren Buffett’s decision to significantly reduce Berkshire Hathaway’s stake in Apple has sparked intense debate among investors. While Apple remains a cornerstone of Berkshire’s portfolio, the sell-off reflects a prudent approach to valuation concerns and portfolio diversification. Despite calls for a higher valuation multiple in 2025, I think that in order for Apple to hit a $4 trillion valuation and continue higher, this move will have to be driven by fundamentals. There’s certainly a strong bull case that can be made that Apple could continue higher on the basis of fundamentals.

But for now I think Warren Buffett is making the moves necessary to ensure he sleeps well at night. At the end of the day, that’s half the battle with investing. So, whether he’s right or wrong over the next year, it won’t matter to him. That’s great.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.