Apple (NASDAQ:AAPL) has been Warren Buffett’s biggest holding in his company, Berkshire Hathaway, since 2016. Now that’s changed with the legendary investor selling off 50% of his stake as of August 3. I’m wondering whether it’s an indicator that Apple shares are becoming less attractive to own.
A value investor’s perspective
Buffett likely sold his stake in the tech company because of its valuation. After reaching all-time highs after the announcement of Apple Intelligence, the price-to-earnings ratio is now nearly 34. That makes the company more richly valued than it has been over the past three years.
A value investor’s primary goal is to buy low and when selling, to sell high. Therefore, Buffett is likely doing his company a service by selling the shares now.
However, some think Apple has more room to rise in price, especially as momentum builds over the next year related to its upgrade cycle driven by AI integrations in its devices.
Despite this growth potential, a traditional value investor like Buffett would likely say that many of those gains are speculative, mainly because the valuation has become very high.
The Oracle of Omaha is building a cash pile
Berkshire’s cash reserves reached a record $276.9bn recently, which gives Buffett more room to make new investments in the future.
It’s worth considering whether he believes the markets could be entering a long-term recession. Also, the seasoned investor might be looking to close the book on his investment record before handing the reins of Berkshire Hathaway over to new CEO Greg Abel.
Furthermore, valuations in the markets right now are quite rich. This is evident not only in Apple’s price-to-earnings ratio but also in the S&P 500, which is now at all-time highs. In other words, this is a seller’s market for a value investor, not a buyer’s one.
What could Apple be worth in a year?
The average analyst price target for Apple includes potential to rise 6.7%, at an average $237. Many bullish analysts suggest it has the potential to reach a $4trn market cap, including Wedbush’s Dan Ives.
In my opinion, the price has more room to run, especially as the AI upgrade cycle related to Apple Intelligence begins in September. However, the market may have already priced this into the shares. Therefore, I think this is a high-risk investment. Buffett may be making a shrewd move by selling his stake.
The long-term outlook
Despite the growth that could come for the big-tech company over the short term, the long-term outlook is less promising.
Apple has saturated its core markets. Management has been turning to emerging countries like India to seek growth opportunities. However, I think the company is unlikely to be able to sustain the growth it achieved in the past.
Furthermore, there are broader concerns that the company hasn’t delivered any truly groundbreaking innovation like the iPhone since Steve Jobs died. Such concerns make the sale from a long-term investor like Buffett more understandable.
I’m not buying for now
I think there are potentially big short-term gains to be had in Apple shares over the next year related to its AI upgrades. However, beyond this, the long-term outlook looks less promising to me. That’s why I’m staying on the sidelines for now.
This post was originally published on Motley Fool
