From: allin
Warren Buffett’s Berkshire Hathaway has significantly reduced its stake in Apple, prompting discussions about the company’s investment strategy and Apple’s valuation and future prospects [00:46:47].
Berkshire Hathaway’s Sale of Apple Stock
Chamath Palihapitiya had previously observed a trend in Warren Buffett’s letters: when Buffett stops mentioning a company, it often indicates he is selling it [00:45:50]. This pattern appears to hold true for Apple [00:46:40]. Since the beginning of the year, Berkshire Hathaway has sold 55% of its holdings in Apple [00:47:22]. At the end of the year, Apple represented 50% of Berkshire’s non-majority owned stock holdings, valued at $174 billion [00:46:57].
Potential Reasons for the Sale
Several theories have been put forth to explain Berkshire Hathaway’s divestment:
- Overweighting Some argue that the Apple position became too large, exceeding 50% of Berkshire’s portfolio at the start of the year [00:47:48].
- Valuation Concerns The stock’s valuation multiple might have become too high, trading at nearly 30 times earnings [00:47:35]. Apple stock has risen 900% since Berkshire bought it in 2016 [00:47:42].
- Cash Accumulation Warren Buffett is building up a “war chest” of cash, the largest cash pile he has ever held, suggesting a defensive position amidst market volatility and a potential recession [00:51:04]. This cash could be used for future acquisitions, or to earn a 5% return on $300 billion [00:55:31].
- Regulatory Risk
Apple is facing significant regulatory scrutiny that could impact its financial performance [00:49:29]. Key areas of concern include:
- Google Antitrust Case: Google pays Apple $20 billion annually to be the default search engine, a revenue stream at 99% margin that is at risk if antitrust rulings stand [00:49:41], [00:54:34].
- China Dependency: Apple has deep relationships with China for manufacturing and product sales, posing a risk as regulators examine company ties to China [00:49:47]. Chamath suggested Buffett’s sale of Chinese company BYD might indicate a broader concern about China dependency in his portfolio [00:51:50].
- App Store Fees: The 30% “Vig” Apple takes on its App Store is under regulatory scrutiny [00:50:06].
- Succession Planning: Following the death of Charlie Munger, Buffett may be consolidating Berkshire’s portfolio to ensure a smooth transition to his successor, Greg Abel, by reducing risk exposure like dependency on a single stock or country [00:52:43].
Apple’s Valuation and Challenges
Apple’s stock, despite the sales, is still up 11-12% year-to-date and recently came off its all-time highs [00:55:00]. It currently holds over $100 billion in cash [00:55:21].
However, Apple faces challenges due to its status as an “effective and unregulated Monopoly” that “doesn’t really know what to do” [00:53:52]. Unlike many of Berkshire’s other significant holdings (e.g., BNSF Railway, Berkshire Energy, Geico), which are regulated monopolies with stable, government-set pricing and distribution, Apple operates in an unregulated environment, making it vulnerable to financially painful transitions once it becomes regulated [00:48:51].
The potential loss of the $20 billion annual payment from Google for default search engine status, if the antitrust ruling stands, could significantly impact Apple’s value, potentially reducing it by half a trillion to a trillion dollars [00:54:52].
Investment Strategy Implications
Berkshire’s decision underscores the principle that there is “no free money” in leveraged trades [00:10:10]. Buffett’s philosophy generally favors companies with great managers, premium products, high margins, and durable moats [00:48:03]. While Apple seemingly fits this criteria, its increasing exposure to regulatory risk and potential future instability differentiate it from Berkshire’s historically stable, regulated holdings. The move suggests a strategic shift towards defensive positioning and readiness for future investment opportunities in a potentially volatile market environment.