There are many ways to get rich on Wall Street, but none seem as reliable as the strategies employed by Warren Buffett. The legendary investor took control of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) in 1965. Over the past six decades, the stock has delivered a 19.6% average annual gain.
There aren’t any secrets to Buffett’s success. In addition to an annual shareholder meeting that can pack a stadium full of investors, Berkshire Hathaway reports its trading activity to the U.S. Securities and Exchange Commission every three months.
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We can see from Berkshire’s disclosures that it ended last September with 300 million Apple (NASDAQ: AAPL) shares in its portfolio. Worth $69.9 billion at the time, the iPhone manufacturer made up 26% of the holding company’s equity portfolio.
Apple is Berkshire Hathaway’s largest holding, but it’s a much smaller holding than it used to be. Berkshire reduced the number of Apple shares on its books by 25% in the third quarter of 2024, and it wasn’t the first sale. Berkshire has reduced the size of its Apple stake by 66.5% since the end of 2022.
Why Buffett sold heaps of Apple shares
Buffett wouldn’t keep Apple at the top of Berkshire’s portfolio if he weren’t confident about the business and its ability to steadily grow earnings over time. That said, selling off more than half of its stake is hardly an inspiring vote of confidence.
Berkshire’s recent sales of Apple stock have more to do with the stock’s stretched valuation than any concern about the business. The stock is trading for about 31.7 times trailing free cash flow. That’s an appropriate price for a business with profits growing by a mid- to high-single-digit percentage, which is not an accurate description of Apple’s performance in recent years.
AAPL Free Cash Flow data by YCharts.
Trailing-12-month revenue has risen by 1.3% over the past three years. Apple’s bottom line has outpaced its top line, but not by much. Free cash flow per share has risen 10.7% over the past three years and has been creeping higher, but only because Apple is repurchasing heaps of its own stock. Total free cash flow has risen only 2.9% over the past three years.
A mismatch between Apple’s valuation and its recent performance puts it in a precarious situation. If the market finds a reason to get nervous about its yearslong earnings deceleration, the bottom could fall out from under the stock.
Why holding some Apple shares is still a good idea
Investors can think of free cash flow as earnings a company can use to pay dividends, reinvest, reduce debt, or repurchase stock. With $108.8 billion in free cash flow over the past 12 months, Apple can pull on a lot of different levers to keep earnings per share moving in the right direction over the long run.
Apple’s device sales aren’t growing very fast, but it is selling a growing array of services to its enormous user base. Last year, the company reported more than 2.2 billion active devices worldwide, and high-margin service sales to all those device holders are picking up.
Fiscal fourth-quarter service sales rose 12% year over year. Now, services are responsible for 26% of total revenue. While device sales will likely creep forward due to market saturation, plenty of those device holders haven’t started subscriptions to iCloud Storage, Apple Music, or Apple TV+ yet. High-margin service sales could allow earnings to continue growing at a single-digit percentage for many years.
The bottom could fall out from under Apple’s stock price the next time the stock market gets sad. Fortunately, it will take more than a bear market to slow Apple’s steadily growing dividend payments. The stock offers a minuscule 0.4% dividend yield at recent prices, but it could safely raise it by leaps and bounds. Over the past 12 months, the company met its dividend commitment with just 14% of the free cash flow its operations generated.
Not time to buy
Apple is still the largest holding in Berkshire’s equity portfolio, but that doesn’t make it a good stock to buy now for most investors. There are plenty of good reasons to retain some shares of Apple in a well-diversified portfolio. Unfortunately, buying the richly valued stock while sales and profits appear nearly stagnant doesn’t seem like a great idea.
Should you invest $1,000 in Apple right now?
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Cory Renauer 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.