Will Berkshire Hathaway Take Another Bite of Apple in 2023?

The iPhone maker's recent swoon creates a potential buying opportunity for Warren Buffett and company

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We don’t talk enough about Apple.

The Cupertino-based tech giant is (by far) the most valuable company in the world — with a market cap over $2 trillion and a consumer brand so powerful and unshakeable that customers often treat their iPhones like beloved members of the family.

Oh, and Berkshire Hathaway owns 5.8% of it.

When Ted Weschler started buying AAPL 0.00%↑ in 2016 — followed by Warren Buffett soon thereafter — no one could have predicted that Apple would eventually become the cornerstone of Berkshire’s massive investment portfolio.

• Apple stock now makes up 37% of the Berkshire portfolio 👀

• The current value of its Apple position ($119.1 billion) is over 17% of Berkshire’s market cap as a whole ($695.8 billion)

• Each quarter, Berkshire receives $210.5 million in dividends from Apple

You could say that as Apple goes, so goes Berkshire.

So, in 2023, I’m going to try to keep a closer eye on the iPhone maker — and how the happenings out in Cupertino might affect the bottom line in Omaha.

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For long stretches of last year, Apple seemed immune to the tech industry’s wider struggles. In fact, it was down just 3.4% as of mid-August. By the end of 2022, though, Apple had succumbed like all the rest (-26.8%) and limped into the new year under $130 per share.

It didn’t get any better in week one of 2023. Apple promptly hit a fresh 52-week low of $124.17, which (briefly) dropped the company’s market cap below the $2 trillion line.

Bloomberg:

The sentiment swing in the stock has been swift. As recently as November, Apple was outperforming the S&P 500, a remarkable feat considering other tech giants like Amazon and Alphabet had lost more than a third of their value in 2022. Apple’s strength was rooted in its massive capital returns to shareholders through buybacks and dividends and the belief that its hard-to-leave ecosystem of loyal customers would insulate the company in a potential recession.

I don’t think that Apple’s gold-standard ecosystem (or legendary halo effect) has diminished at all, but a variety of other concerns — from gloomy macroeconomic forecasts to softening demand to snarls in the supply chain — conspired to cloud the company’s short-term outlook.

Mr. Market does not like uncertainty — hence Apple’s falling stock price.

For companies like Apple, it’s difficult to determine just what is “normal” demand in our brave, new, post-Covid world. Sales of Macs, iPhones, iPads, Apple Watches, and AirPods exploded during the pandemic — in large part because stuck-at-home customers needed new devices for remote work and new playthings to pass the lonely hours of quarantine.

Demand was so brisk, in fact, that it seems all but certain that purchases were pulled forward into 2020-2022 from future years. That’s not good news for Apple’s 2023 numbers, but doesn’t really indicate any big shift in consumer sentiment or demand.

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If Apple surprises to the upside in 2023, it will likely be thanks to an entirely new product category.

On Sunday, Mark Gurman of Bloomberg warned that the coming year might be a quiet one for Apple. The company’s main goal appears to be the successful launch of a mixed-reality headset rumored to be called Reality Pro.

This augmented reality device — also rumored to cost upwards of $1,000-$3,000 — will even get its own operating system and apps.

While Apple still has many kinks to work out with the device — involving hardware, software, and services, as well as how it will be marketed and sold — the company is banking on the product as its hot new introduction for this year.

Sounds like Apple is hurriedly pouring all of its resources into finishing and fine-tuning this product. Which lines up well with Gurman’s other scoop: that Apple will not offer any major updates to iPad, Mac, Apple Watch, or Apple TV in 2023. Even iOS will likely see features delayed or canceled due to time constraints.

For years, people have been begging Apple for a new product. Well, here it comes.

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So, will Berkshire Hathaway buy the dip?

Or does it already own enough Apple?

Frankly, I don’t think Warren Buffett cares one whit that Apple makes up such a substantial part of his portfolio. He’s not exactly a devotee to diversification.

Here’s the proof: As recently as last year — when Apple was over 40% of the Berkshire portfolio — he was still buying more of it. Buffett and co. added 3.78 million shares in Q1 2022 (when Apple dipped as low as $150) and 3.87 million more in Q2 2022 (probably in the $130s).

Now, the price of AAPL 0.00%↑ is even lower.

While it’s impossible to predict what Buffett or his investing lieutenants will do, I wouldn’t be at all surprised to see Apple pop up on the buy side of a Berkshire Hathaway 13F in the coming months.

But, whether or not Berkshire buys more shares during this latest dip, its stake in Apple will continue to get bigger and bigger as time goes on. Such is the beauty of Tim Cook’s extremely aggressive share repurchase program.

Berkshire started its Apple position in early 2016 and, since then, the iPhone maker has bought back an astounding 27.3% of its outstanding stock. Shares of Apple (split-adjusted) have dropped from 21.9 billion in 2016 to 15.9 billion today.

That’s the kind of capital allocation that warms Warren Buffett’s heart.

Before moving on, though, I must point out that Berkshire’s position in Apple could easily be bigger still — if not for the ill-advised sale of 93.5 million shares in the second half of 2020. Within a few months, Buffett already regretted the decision.

Buffett: I sold some [Apple] stock last year, although our shareholders still saw their shares go up because we repurchased shares. But that was probably a mistake. Charlie, in his usual, low-key way, let me know that he thought it was a mistake, too. Didn’t you, Charlie?

Munger: Yes.

Hey, no one’s perfect.

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Remember: Berkshire Hathaway’s initial Apple investment was a classic value play.

The Cupertino-based company was trapped in a malaise in the mid-2010s because everyone was worried that iPhone sales were slowing down.

When Weschler and Buffett made their move, Apple traded at just 11x earnings. That’s the kind of valuation more often found on a staid, low-growth business like Campbell Soup. Not the creator of the iPhone.

In hindsight — and, really, it should have been obvious to all of us at the time — Apple was ridiculously cheap. And Berkshire pounced.

Right now, in 2023, I wouldn’t describe Apple’s price tag as ridiculously cheap. Better than fair value? Perhaps. A screaming deal? Ehh…

But, as Warren Buffett is wont to say, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

That 11x earnings multiple from 2016 might be gone for good, but Apple nevertheless remains one of the best companies in the world selling near multi-year lows.

In Warren & Charlie I Trust.

(But I, for one, hope that Berkshire is buying more Apple here.)