Apple (AAPL 1.02%) has been one of Berkshire Hathaway‘s largest holdings for some time. However, Warren Buffett and his team at Berkshire have started to unload the position, selling Apple stock every quarter since Q4 2023.
Berkshire used to hold around 915 million shares of Apple at its peak; now it holds only 300 million, down from 400 million in Q2. As Buffett and his team unload their Apple position, should investors follow suit? Or is there something else going on here?
Apple isn’t the same company Berkshire originally invested in
Apple has easily become the most dominant tech brand in the U.S., and its influence has spread worldwide. You don’t have to look hard to find an Apple product in the U.S., whether it’s a laptop, AirPods, or the iPhone. This was fairly true back in 2016 when Berkshire first purchased Apple stock.
However, the stock looks a lot different now than it did nearly nine years ago. When Buffett and his team first purchased Apple stock, they saw deep value, as it traded around a price-to-earnings (P/E) ratio of merely 10.6.
AAPL PE Ratio data by YCharts
If you think back to 2016, it’s not hard to remember that Apple was still the dominant tech brand, so this investment opportunity was right in front of many investors. Although Buffett isn’t historically a tech investor, he is a value investor, and this represented huge value.
Buffett was right, and Apple’s stock has skyrocketed since he took a position in 2016. However, not all of it was because of business performance. While Apple’s trailing-12-month revenue and earnings per share (EPS) have risen 66% and 157%, respectively, the stock price has risen nearly 800% since then.
If long-term market returns are highly correlated to earnings growth, how is Apple outperforming its EPS growth by that much? It all depends on how much investors are willing to pay for the stock.
Apple is far from a value stock
Apple no longer trades for the bargain bin price of 10.6 times earnings. It now trades for 39 times trailing earnings. That means the price investors are willing to pay for Apple’s earnings is four times as much now as in 2016. This effect is called “multiple expansion,” as the earnings multiple that investors are willing to pay has increased. This eliminates the value proposition of Apple stock and has likely spurred Berkshire to unload its shares.
However, Buffett hasn’t publicly stated it this way. Instead, he’s framing it as taking gains. At Berkshire Hathaway’s annual shareholder meeting in 2024, Buffett talked about taking gains while the federal tax rate was at historically low levels. With Donald Trump winning the presidential election in the U.S., an increase is almost certainly off the table for the next four years, so if Berkshire continues to sell Apple stock in Q4, we’ll know that Buffett is selling for a different reason than taxes.
If Buffett came out and said, “Apple is overvalued, I’m selling my position,” it would cause mass panic and crash the stock price. Plus, with how large Berkshire’s stake is, it would lose huge gains. As a result, Buffett and Berkshire need to keep their cards to their chest, as they may have more selling to do.
While Apple is far more expensive than it used to be, it also lacks the business performance to back up that valuation. Last quarter, Apple’s revenue grew at a 6% pace, and EPS tumbled 34%. Since the start of 2023, Apple’s business has stayed flat, yet the multiple has increased.
AAPL Normalized Basic EPS (Quarterly YoY Growth) data by YCharts
This relationship can’t continue forever, and an Apple correction may be imminent if the business doesn’t start growing soon. Buffett and his team at Berkshire are sitting on massive gains from Apple’s stock largely due to its price tag becoming more expensive. I wouldn’t be surprised to see their entire position disappear throughout 2025, and I think investors should follow suit as the business and stock price is out of sync.
Keithen Drury 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.
