Why Did Buffett Sell Apple?

The Oracle from Omaha likes Apple – that much is not in question. It’s been part of the record for a while that Warren Buffett’s Berkshire Hathaway (BRK.A) has made an enormous play in Apple stock, to the tune of $90 billion or 245 million Apple shares as of this past summer.

In fact, at a valuation of around $90 billion, the stake in Apple represents about 20% of Berkshire Hathaway’s total value of approximately $440 billion.

This begs the question – why did this front-running authority on equities get so attached to a particular stock exchange offering?

Why Buffett Bought AAPL

Warren Buffett originally bought Apple stock for a number of reasons, some of them tied to his long-term strategy of running Berkshire Hathaway as its own conglomerate. Buffett himself was forthcoming at the time, and has been vocally bullish about Apple since.

“I don’t think of Apple as a stock,” Buffett has told reporters. “I think of it as our third business.”

Experts explain that Berkshire Hathaway’s main business is insurance, and a secondary business operation involves capturing certain types of last-mile delivery with investments in railroads.

So there is kind of a precedent in terms of Berkshire Hathaway’s partnership with GEICO, which is itself a mammoth business. Still, there are specific reasons why Buffett chose Apple in the first place.

In terms of corporate strategy, there’s Apple’s ability to generate cash and pay down debt – there’s also good historic earnings per share ratios.

In addition, recent share prices are also backed up by analysis: for example, a discounted cash flow analysis places fair market value per share of AAPL at $127.20, and the fact that AAPL is near all-time highs does not preclude further gains, according to many of the experts looking at the history of Apple prices.

To be sure, there is a fair amount of volatility in the sector, and other caveats related to big tech in general, but as part of the renowned FAANG group along with Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG), Apple enjoys a reputation for solid growth and market dominance.

However, one very significant argument that Buffett has used to explain his interest in Apple is the company’s protective ecosystem. Apple’s strategy, Buffett posits, preserves its dominance in its technology market, and that’s also one of the best selling points that Apple can offer any investor right now.

As a maker of smartphone operating systems and more, Apple is widely known as having its own “walled garden” – an ecosystem that’s notoriously hard to break out of.

All sorts of design elements make it hard to use aftermarket services with an iPhone, and in general, users have to choose either an iPhone or an Android platform for one of the biggest technology sea changes we’ve seen across the world in the last two decades.

In fact, the smartphone example is really central to why Buffett would choose Apple. Even though the investor himself only reportedly switched to a smartphone earlier this year, he could see the writing on the wall in terms of high customer loyalty to Apple and what the company was building – essentially a protective “moat” around its business model.

Does Buffett Still Own Apple?

If you look critically at Buffett’s recent sale of Apple stock, you’ll see that it weighs in at 36 million Apple shares. That’s not anything near the bulk of his original Apple holdings.

In fact, it’s much less than a lot of his other plays. For instance, according to reports, Buffett recently sold his holdings in J.P. Morgan (JPM) to the tune of 96% and untethered from PNC Bank at around 64% of his prior PNC holdings.

His Apple divestment would essentially be close to 10%, by contrast.

Another way to look at it is that Buffett still owns more Apple stock than the value of everything that he traded during this year’s pandemic.

Analysts cite investment changes of $6 billion in a past quarter, which is obviously much less than the total Apple stock that Buffett still owns.

Is Apple A Good Investment?

In key ways, Buffett is still on the Apple bandwagon.

As for whether Apple is a good investment for anyone else, Apple’s business model is probably still the best advertisement for its continued domination of its markets.

The earnings per share and the technical history is the same as it always was. But some investors are wary of buying into Apple now, because its stock prices have already soared for years.

There’s the skepticism of getting into an established blue-chip stock and thinking that it’s going to continue to grow like it already has.

However, with Apple locking down its smartphone markets, there’s the argument to be made that it’s likely to continue to grow as the smartphone market does.

And smartphones don’t seem to be going away anytime soon – in fact, from multifactor authentication to selfies, you could argue that smartphones are still taking off.

Warren Buffett Apple Sale: The Bottom Line

In the end, with the relatively minuscule amount of Apple stock that Warren Buffett sold relative to his entire portfolio, his sale of Apple could reasonably be thought of as simple portfolio management.

Any good investor understands the principle of diversification and leveraging capital over time, and according to Buffett and his henchmen, that’s really what this is.

You can see other incremental changes in Berkshire Hathaway’s strategy – for example, even though Buffett has been extremely critical of cryptocurrencies, Berkshire Hathaway recently bought into the IPO of a company called Snowflake that works on in an Ethereum blockchain.

So the bottom line is this: Buffett was reorganizing his portfolio, but he’s still into Apple big time, and he still considers it a major part of his investment strategy for the future.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.