Investors must decide how to proceed with Apple near all-time highs and a significant stakeholder selling shares.
Apple (AAPL 0.20%) recently closed out its fiscal year 2024 with fourth-quarter earnings, and the market responded with a shrug. The stock is down a few percentage points from before its earnings report, but it’s nothing to sound the alarm about. After all, the stock has returned 25% over the past 12 months. That’s not bad for a stock carrying a whopping $3.3 trillion market cap.
However, one of Apple’s largest investors, Berkshire Hathaway, reported earnings, too. Berkshire, run by legendary investor Warren Buffett, keeps trimming its stake in Apple; that stake has fallen in value from over $170 billion to just $66 billion today.
Investors must make their own decisions. That said, I get it. Buffett is arguably Wall Street’s biggest name, so it’s tempting to think about the moves his company is making when weighing buying, selling, or holding the stock for yourself.
The reality is that Berkshire’s reasons for selling Apple likely have nothing to do with you. I’ll discuss Berkshire’s selling, what actually matters for Apple stock, and whether the stock is a buy, sell, or hold as the market barrels toward 2025.
Selling Apple makes sense for Buffett, and why it probably doesn’t matter to you
Yes, Berkshire Hathaway has sold over half its Apple stock. But that doesn’t mean Buffett’s company no longer believes in Apple’s potential. Buffett has repeatedly praised Apple and called it a better business than American Express and Coca-Cola, two of Berkshire’s longest-standing investments, earlier this year.
It should be noted that Apple stock has become significantly more expensive since Buffett first bought it — the company’s price-to-earnings (P/E) ratio has steadily increased over the past eight years:
AAPL PE Ratio data by YCharts
That could have impacted Buffett’s timing in trimming Berkshire’s Apple stake, but in my view, it was bound to happen anyway. The Apple stake grew to nearly 20% of Berkshire’s market cap earlier this year. Berkshire is basically a trillion-dollar portfolio of private businesses and stakes in public companies. Having so much value tied up in a single asset is risky.
Cashing in some of those chips at such a high profit was prudent for Buffett. However, I don’t think it’s worth weighing too heavily for individuals deciding whether or not to own Apple.
Explaining Apple’s higher valuation
Yes, Apple is more expensive now than a decade ago. However, Apple’s business has changed. Its iOS devices (primarily the iPhone) have created a massive customer base to which it sells highly profitable subscription services. Those service revenues represented about 24.5% of total sales in 2024, up from 22.2% in 2023.
Selling more services and outsourcing its supply chain has made Apple a more efficient business with a far higher return on invested capital (ROIC). This helps explain why Apple’s valuation has risen so much … it’s a fundamentally better business today.
AAPL Return on Invested Capital data by YCharts
In this light, I don’t think Apple stock will trade at 12 times earnings as it once did, barring some collapse in the broader markets.
Is Apple a buy, sell, or hold?
But that doesn’t mean the stock is a bargain today. A more efficient Apple can make more money with less capital, but ultimately, the stock’s valuation must make sense for the earnings growth you get.
Apple hopes that Apple Intelligence, a set of artificial intelligence (AI) features implemented in iOS 18, will boost device upgrades. Apple posted 6% year-over-year revenue growth in Q4 but guided for low- to mid-single-digit growth next quarter. To be fair, it’s still early. Apple only released Apple Intelligence a couple of weeks ago, so it will take time to impact the company’s numbers.
Apple earned $6.08 per share in 2024, and analysts currently project that earnings per share will grow 21% to $7.40 in fiscal year 2025 (ending September 2025) and another 11% to $8.25 the following year. Over the next three to five years, analysts estimate Apple will grow earnings by about 12% annually. Apple is such a good business that it earns a premium to most others, but it’s hard to lean further into the stock at a PEG ratio of about 3. In other words, Apple’s valuation is a little too lofty for its expected earnings growth.
Apple is too good a business to sell, but investors should probably wait to buy until its valuation cools off or there is more certainty in Apple’s growth prospects. Consider the stock a hold today.
American Express is an advertising partner of Motley Fool Money. Justin Pope 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.
