In the investment portfolio of Berkshire Hathaway (BRK.B) (BRK.A), Apple Inc. (AAPL) is undoubtedly one of Warren Buffett’s most successful investments. As the largest holding for a decade, Apple has delivered an astonishing total return of nearly 1000% for Berkshire. However, the situation has recently begun to change, as Buffett has started gradually reducing his stake in Apple, with the notable sale of another 42 million shares in the third quarter. If this pace continues, American Express is poised to soon replace Apple as its top holding. The reasons behind this move primarily stem from concerns emerging in three areas: revenue growth, product innovation, and stock valuation.
Slowing revenue growth is one of the core issues. Although Apple’s revenue of $416 billion in the last fiscal year represented a nearly 7% increase from the previous year, the growth momentum was overly reliant on the iPhone and services. Extending the observation period to the past three years, its cumulative revenue growth rate was only 7.4%, significantly lower than the 37% of competitor Alphabet and the 44% of Microsoft. The latter two companies are fully capitalizing on the AI wave through their cloud computing divisions, whereas Apple has yet to make significant inroads in this area. Among all the tech giants, Apple’s growth pace is the slowest, which is enough to raise investor concerns and may well be a key consideration in Buffett’s decision-making.
At the same time, Apple appears to be losing momentum in product innovation. Although the Apple Watch and AirPods were once seen as successful product examples, their combined revenue of less than $37 billion last year accounted for less than 10% of Apple’s total revenue. The core of the company’s business remains firmly tied to the iPhone and its related services. However, in terms of exploring new hardware markets, products like the Apple Vision Pro, launched two years ago, have not achieved success. An even greater challenge comes from the field of artificial intelligence. While startups like OpenAI are exploring native AI hardware and Alphabet is deeply integrating advanced AI features into its Pixel phones, Apple’s insufficient investment in this area poses risks. If competitors continue to make breakthroughs in the underlying technology of smartphones or the next generation of computing devices, Apple’s market dominance with the iPhone could gradually erode. The situation in software services is equally concerning. Reports suggest that Apple even needs to pay an annual fee to Alphabet for Gemini to provide technical support for Siri, reflecting its innovation struggles and potentially undermining the profitability of its services business.
Ultimately, these issues are reflected in its concerning valuation. Apple’s stock trades at a price-to-earnings ratio as high as 37, which is not only higher than Alphabet’s 27 but also on par with the faster-growing Microsoft. This valuation level appears to be disconnected from the company’s actual growth prospects. Therefore, as Berkshire Hathaway reduces its stake in Apple, it is simultaneously increasing its holdings in Alphabet, which boasts a lower valuation and stronger innovative vitality. This contrasting move provides a clear reference for market decision-making.
