Apple (AAPL), the consumer tech behemoth and the largest company in the world by market cap, just saw one of its largest investors, Warren Buffett, sell more than half his holdings and counting. Despite this negative signal, Apple stock continues to surge higher on the back of artificial intelligence (AI) enthusiasm. However, AI comes with third-party reliance and product differentiation concerns. Not to mention, the market seems to be ignoring Apple’s plethora of black swan risks and long-term challenges. All things considered, I’m bearish on AAPL.
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Why Is Buffett Selling AAPL Stock?
Warren Buffett purchased Apple shares a long time ago, when the stock traded at roughly 12x earnings and had excess cash to spend on buybacks. Today, the company has a negative current ratio (current assets/current liabilities) and trades at 34x earnings. A PE (price-to-earnings) multiple of 34x translates to just a 2.94% earnings yield, which is far less than the 5.1% Buffett is getting on short-term treasury bonds. In other words, Buffett is getting more interest on these bonds than he was getting in buybacks and dividends from Apple.
Buffett isn’t finding much to buy in what looks like an overvalued U.S. market. Berkshire Hathaway currently has a near-record 25% of its assets sitting in cash and short-term treasuries.
Buffett may also be Seeing some Black Swan Risks
Buffett indicated at Berkshire Hathaway’s annual meeting that he’s expecting higher corporate and capital gains tax rates in the U.S. But, I believe Apple has other black swan risks that Buffett has his eye on.
For example, in the past, Buffett discussed why he sold TSMC stock ($TSM), stating, “I don’t like its location, and I’ve re-evaluated that.” Apple’s chip supplier (TSMC) and its manufacturers are concentrated in China and Taiwan, where tensions have built over China’s desire for reunification, threatening peace in the area.
The risk of a Russian/Ukraine-like situation exists here if China ever decides to invade Taiwan. In my estimation, this would completely disrupt Apple’s business. Now, Apple is trying to diversify away from the area. Nonetheless, I think it will be very challenging for Apple to maintain its product quality once TSMC chips are produced in the U.S. and iPhones are manufactured in Vietnam and India.
Moreover, Apple has exceptionally high margins, partially due to its monopolistic App Store. In fact, the European Union (EU) recently set its sights on Apple’s App Store, with its competition regulator, the European Commission saying, “Apple’s App Store squeezes out rival marketplaces.” This marked the first time that the EU regulator found a company in violation of the Digital Markets Act (DMA). Apple could face a fine of up to 10% of its global revenue in case of non-compliance with EU’s rules.
Also, the EU doesn’t like the App Stores’ 30% commissions. I believe Apple may have to make its app store less of a monopoly over time, which will decrease its profit margins. The Democratic party’s lead in the polls and a potential leadership switch to Kamala Harris, who is known for fighting big corporations, further supports this view.
Additional Risks to Consider
Another risk that supports my bearish view of Apple is the used iPhone and Mac markets. I may never buy a new iPhone or Mac because the used products are of such high quality and are significantly less expensive. This may be why you’re seeing upgrade cycles stretching out further.
Lastly, no consumer tech company has remained dominant forever. Just look at Polaroid, Sony, Kodak, Dell, BlackBerry, Westinghouse Electric, Xerox, and General Electric. If Apple should ever lose its edge, at 34x earnings, you could see its margins and stock totally collapse. Apple is currently facing renewed competition in China, where it is losing market share to Huawei and others. I think Apple could look more like Sony in ten year’s time. The market seems to be ignoring this risk because it has such a short focus, often thinking only about the next 12 months.
Apple’s AI Offerings may Disappoint
I believe generative AI is becoming commoditized. You have generative AI products like Perplexity, ChatGPT, Gemini, Llama, and others that are widely available and free to use. You also have all kinds of free-to-use AI image-generation software out there. All of this is available on old iPhones and Android. I think the AI functionalities on the new iPhones won’t be differentiated enough to be worth the cost to consumers.
Moreover, Apple has to partner with OpenAI to bring these generative AI experiences to its customers. If Apple becomes increasingly reliant on OpenAI and TSMC to bring consumers AI capability, this third-party reliance could eventually eat into Apple’s gross margins. For these reasons, I think AI iPhones may disappoint investors.
Is AAPL Stock a Buy, According to Analysts?
Currently, 24 out of 34 analysts covering AAPL give it a Buy rating, eight rate it a Hold, and one analyst rates it a Sell, resulting in a Moderate Buy consensus rating. The average AAPL stock price target is $247.43, implying 9.1% upside potential.
The Bottom Line on AAPL Stock
I think the current bull market, with its AI aspirations, has caused investors to ignore Buffett’s huge sale of Apple shares and the company’s plethora of black swan risks, ranging from government intervention to geopolitical threats to long-term margin contraction. As a result of these potential headwinds, I’m bearish on AAPL stock at a valuation of 34x earnings.
