To my mind, one of the most interesting developments in financial markets in the last few years is Warren Buffett’s accumulation of a large stake in Apple (AAPL). Long a technophobe in investing, Buffett ultimately built up a nearly 1 billion share position currently worth nearly $140 billion – and is sitting on more than $100 billion in paper profit. In his 2021 Annual Letter – in the section entitled “Our Four Giants” – Buffett wrote that AAPL is now Berkshire’s second largest holding by market value behind its insurance operations. The large investment in the greatest company of all time by the greatest investor of all time is certainly intriguing.
My concern is that this investment – while off to a terrific start – has peaked and is in the process of rolling over. On the one hand – as Tripp Mickle brilliantly argues in his book After Steve: How Apple Became A Trillion Dollar Company And Lost Its Soul (2022) – AAPL’s days of revolutionary innovation are likely behind it. They haven’t created a revolutionary product since the iPhone in 2007 which is now mature; iPhone revenue was only +7.6% in the last two quarters. Most of the growth in AAPL’s business in recent years has come from Tim Cook’s development of the services businesses which is evolutionary not revolutionary – and the share price has benefitted from multiple expansion.
On the other hand, Buffett seems to be approaching AAPL as a lifetime hold. Despite massive gains in his position, he has barely sold any shares. The Wall Street Journal’s Dan Gallagher pointed out in Thursday’s paper that AAPL shares currently trade for 21x forward earnings estimates (“Apple Isn’t Priced For A Recession” [SUBSCRIPTION REQUIRED]) – and I suspect those estimates are too high. That’s a growth stock valuation but – as I argued a couple months ago – AAPL is no longer a growth stock. In that blog, I argued that during this bear market AAPL will inevitably be rerated for the mature value stock it now is which means a share price of $100 – or lower.
Disclosure: Top Gun is currently long a sliver of AAPL shares via QQQ.