As Warren Buffett Continues to Trim Apple Stake, Should Investors Be Worried?

Key Points

• The Warren Buffett-led conglomerate sold more Apple shares in Q2, but the tech giant is still its largest holding.

• Apple's services segment continues to set records and now drives nearly half of quarterly gross profit.

• There's no way to know what Berkshire's plans for its remaining Apple shares are.

• 10 stocks we like better than Apple ›

Apple (NASDAQ: AAPL) is back in the headlines because Berkshire Hathaway (NYSE: BRK.B)(NYSE: BRK.A) pared its stake again in the June quarter -- extending a selling spree that started in the fourth quarter of 2023 but had paused for several quarters. The Warren Buffett-led Berkshire's latest 13F filing shows holdings of roughly 280 million Apple shares as of the end of Q2. The share count still leaves the position as Berkshire's largest equity holding. Put differently, Berkshire remains heavily tied to Apple even after recent sales. That context matters.

Getting right to the point, investors shouldn't ever reflexively buy or sell simply because Berkshire is trimming. Still, some context is helpful for those who are concerned because of Berkshire's recent move.

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What Berkshire's sales really mean

It's important to note that Berkshire's position in Apple has grown massively since the company started buying shares of the tech giant in 2016. This left Berkshire's portfolio unusually concentrated. Reducing the position recently, therefore, has helped manage risk at the parent company level.

But even after recent sales, the position is still substantial, valued at about $64 billion as of this writing. If anything, therefore, Berkshire's massive position is a testament for Apple as an investment, not against it. The conglomerate is still making an enormous bet on Apple -- just with a bit more balance.

Still, there's just no way to know the exact reasons for Berkshire's most recent sales of Apple stock. All we can do is speculate.

Strong fundamentals

Left in the dark about what Buffett plans to do with his remaining Apple stock, the best we can do is focus on fundamentals to inform our own investment decisions. On this front, the tech company is doing great -- and it has some important catalysts that could help both top- and bottom-line growth accelerate over the next year or two.

Apple's fiscal third-quarter results (a period that roughly lines up with the second calendar quarter) were strong. Revenue rose 10% and earnings per share grew 12%, with its services business hitting an all-time high.

Importantly, Apple's services gross margin is around the mid-70s, driving a greater share of the company's profitability over time. The important segment generated $20.7 billion of gross profit versus $23.0 billion for products (about 47% of total gross profit) despite services representing only 29% of revenue. This is an important dynamic to understand because Apple's service segment is not only higher margin and more recurring than its product segment, but it is growing faster than its products business. Services revenue rose at a rate of more than 13% year over year in fiscal Q3, while products revenue rose 8%.

Key catalysts from Apple's services segment include higher sales from advertising, the App Store, and cloud services. These are software- and platform-centric lines tied to Apple's ever-growing installed base of active devices, not to the upgrade cadence of a single hardware product. That makes cash flows sturdier through cycles.

Why Apple shares are a buy despite Berkshire's recent sales

Apple stock's valuation isn't cheap, but it's not wild for a tech company with a powerful brand and loyal customers that is increasingly tilting toward lucrative and recurring services. As of this writing, Apple's price-to-earnings ratio sits just below 35. If services' contribution to profit keeps rising, and if revenue reaccelerates as services become a larger part of the business, a valuation like this makes sense. In addition, there are other potential catalysts that could help lift future growth rates, including a possible launch iPhones with entirely new form factors that could drive a big upgrade cycle, or significant new artificial intelligence integrations into its software.

Of course, there are meaningful risks to owning the stock at this valuation. If top-line growth rates unexpectedly drop back down to mid-single digit levels or lower, the stock could get punished. But given Apple's long history of execution and the growing size of the company's services business, this might be a risk worth taking.

While we don't know why Berkshire sold Apple shares last quarter, we do know that Apple remains Berkshire's largest holding, and that the tech company's own results show a business leaning into more profitable, recurring revenue.

You should not outsource your decision-making to anyone -- even Berkshire. Do the work: weigh Apple's Services momentum, its capital return discipline, and today's valuation. On balance, I personally believe Apple still looks like a high-quality compounder whose growing services engine can support a premium valuation multiple over time.

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Daniel Sparks and his clients have positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.