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Buffett is an opinion leader in the global investment community, and Apple Inc. is one of his most successful investments in the past decade. It is also Berkshire Hathaway's largest holding, with a market value of up to 51% of the investment portfolio. Buffett's significant reduction in holdings of Apple Inc. in the past quarter has sparked speculation and concerns among global investors about the company's development prospects. This report attempts to help investors clarify the underlying reasons, including: 1) changes in the regulatory environment faced by Apple, 2) the potential impact of new technologies such as Apple Intelligence, and 3) macroeconomic and policy uncertainty. We hope to provide reference for investors.
Event: Buffett reduces his stake in Apple Inc. by half, sparking high market attention
According to the disclosure, Buffett started investing in Apple stocks in Q1 2016 and has held 900 million shares by 2021, accounting for 5.5% of the total share capital, making him the third largest external shareholder of Apple. Buffett has repeatedly expressed his optimism about Apple's business model and active repurchase attitude at the annual conference. But starting from Q1 2024, Buffett began to reduce his holdings of Apple, with his current holdings dropping to 395 million shares (a 56% decrease from his peak holdings). Against the backdrop of weak smartphone sales, Buffett seized the investment opportunity of Apple's transition from hardware (12x PE, average Q1 2016) to services (32x PE, average Q2 2024).
Possible reason # 1: Deterioration of regulatory environment, Apple's integrated software and hardware business model may face challenges
Apple's business model includes outstanding product design, a global supply chain, an innovative IOS+app store, and a unique ecosystem built on popular product marketing. But in recent years, this ecosystem has faced challenges from regulatory authorities in Europe and America. On August 5th, the US District Court ruled that Google's exclusive contract with Apple to ensure search dominance violated US antitrust laws. According to court documents, Google paid Apple $20 billion in 2022 to obtain default search status for Apple's Safari browser, accounting for 5% of Apple's revenue and 20% of its net profit for the year. On the other hand, after the EU Digital Markets Act comes into effect in May 2023, Apple will need to open third-party payment and app stores in the EU and lower commission rates. In 2023, service revenue will account for 22% of Apple's revenue, and the above changes will have a negative impact on Apple's service revenue and profits, which contradicts Buffett's investment logic.
Possible Reason # 2: The cost increase caused by AI may prolong the phone replacement cycle
On June 11th, after the release of Apple Intelligence at WWDC, Apple's stock price rose as much as 13% (as of August 9th, 2024), and the market has high expectations for AI to stimulate Apple users to switch devices. But we believe that the biggest contradiction currently facing AI smartphones is whether users are willing to pay for the rising software and hardware costs in the early stages of AI implementation. Mobile phones are one of the best entry points for AI services. We believe that AI will reshape the entire mobile application ecosystem, including hardware, operating systems, and application distribution models, in the long run. However, the entire reshaping process may require significant investment in research and development, and is a gradual process. It remains to be seen whether consumers will accelerate the replacement process for AI functionality (with both quantity and price increasing), or slow down the replacement process due to rising prices (with both quantity and price decreasing). Buffett's reduction in holdings may also reflect a relatively cautious attitude towards the current development of AI smartphones.
Possible reason # 3: Buffett's cash holdings have reached a historic high, which may reflect a cautious attitude towards macro policies
Mobile phones have certain optional consumption attributes, and the global economic downturn may have a negative impact on sales. According to Factset, the current market forecast for 2024E/25E iPhone sales is 227 million units/237 million units respectively, with a year-on-year growth rate of -1.7/4.4%. Global investors mainly focus on the low-cost SE models for next year's iPhone growth, while holding a conservative attitude towards the overall sales of the iPhone 16 series. In addition, according to Factset data, Berkshire's cash to total assets ratio has reached 25%, an increase of 10.8 percentage points compared to 2Q23, reaching the highest level since 2005 before the global financial crisis. This may reflect Buffett's more cautious attitude towards global macroeconomics. In addition, due to the high proportion of Chinese companies in the Apple supply chain, if more aggressive tariff measures are taken in the future, it may to some extent affect Apple's supply chain costs.
Risk Warning:
The risk of escalating trade frictions between China and the United States, macro downward risks, and the risk of less than expected penetration of innovative products. The content related to unlisted companies or stocks not covered in this research report is a compilation of objective public information, and does not represent the recommendation or coverage of the company or stock by our research team.