Apple's rock-solid fundamentals position "halved"! Will Buffett's new move that swept the investment circle be imitated?

For ardent fans of Apple (AAPL.US) iPhones and Apple stock, the significant selling of Apple shares by "Stock God" Buffett's Berkshire Hathaway Inc. may be interpreted as a lack of confidence in the growth prospects of this iPhone manufacturer; or combined with Buffett's recent substantial selling of Bank of America (BAC.US) shares, these actions of hoarding cash in the context of high interest rates in the United States may be seen as the "Stock God" seemingly betting on a US economic recession.

However, many investment institutions on Wall Street are urging investors to try to ignore these messages, not to let market news affect investment decisions and judgments, and it is currently very important to stay calm. Historically, whenever an institution massively sells Apple, causing a panic-induced plunge in Apple's stock price, the stock price inevitably fully recovers from the decline and continues to set new historical highs.

The conglomerate led by Warren Buffett revealed last Saturday local time that it sold nearly half of its stake in this tech giant in the second quarter. Its stake is now valued at about $84 billion, lower than the approximately $140 billion at the end of March, and it has pushed Berkshire Hathaway's cash reserves to a new all-time high of $276.9 billion, selling more stocks than buying for seven consecutive quarters.

In addition, since July, after four rounds of selling, Buffett's Berkshire Hathaway has cumulatively sold 90 million shares of Bank of America stock, cashing out up to $3.8 billion. However, Berkshire still holds 942 million shares of Bank of America stock and remains the largest shareholder of Bank of America.

Buffett's sale of Apple shares comes amid a new wave of AI investment frenzy in the US stock market. In this frenzy, Apple's fundamentals are rock solid, and Buffett's most favored financial indicator - free cash flow reserves - are incredibly strong. Apple has announced its largest-ever $110 billion stock buyback plan to boost shareholder returns. During Buffett's selling of Apple, Apple's stock price surged by 23%, maintaining a market value of over $3 trillion, reclaiming the title of the world's highest market cap company, leading ahead of Microsoft and NVIDIA, while the S&P 500 index repeatedly hit historical highs.

Apple's "almost stingy" approach to AI layout is highly favored by the market

Since Buffett first disclosed Berkshire Hathaway's holding of Apple shares in 2016, as the tech giant has consolidated its control over the industry and perfected the Apple ecosystem, its stock price has soared by nearly 900%, bringing Berkshire billions of dollars in unrealized profits during this process Representatives from Apple and Berkshire Hathaway did not respond to media requests for comments outside of normal working hours on the weekend.

"In my opinion, Buffett's reduction of Apple holdings is simply for risk management," said Joe Gilbert, Senior Portfolio Manager at Integrity Asset Management. "If there were any concerns about Apple's long-term viability, Buffett would exit the entire position. Similar to the reduction of other stock positions at Berkshire Hathaway, Buffett also holds significant unrealized gains."

A few days before Berkshire Hathaway disclosed its investment portfolio, Apple released its better-than-expected quarterly performance, showing a recovery in revenue growth and implying that the new AI feature Apple Intelligence will significantly boost iPhone sales in the coming quarters. Despite a general decline in the US stock market on Friday, Apple's stock price remained stable and ultimately rose against the trend after the financial report was released last week.

Furthermore, based on the performance conference call and financial disclosures, Apple's capital expenditure on AI appears to be extremely "stingy," with a scale much lower than tech giants like Microsoft, Google, and Amazon who have spent heavily on purchasing NVIDIA AI GPUs. The growth rate may also be much slower, but this almost frugal spending may be the preferred approach in the current market.

After all, looking at Q2 tech company financial data, the prospects for AI monetization still seem elusive, with AI revenue being almost negligible compared to the massive scale of AI infrastructure spending. Therefore, the market hopes that tech giants can maintain strong profit margins while developing AI technology, and investors undoubtedly prefer Apple's gradual AI spending model.

The current market is not willing to see a growing scale of AI spending that significantly impacts the profit margins of tech giants. This is reflected in Apple's stock price, which did not experience a significant decline like Microsoft, Google, and Amazon after announcing its performance, but instead rose against the global stock market decline.

Apple's latest financial report for the third quarter of the 2024 fiscal year ending on June 29th revealed that its expenditure on real estate, factories, and infrastructure amounted to $2.15 billion, an 8% increase from the previous quarter and approximately 3% higher than the same period last year. It is worth noting that Apple's expenditure base for the aforementioned items was already high last year, mainly due to the expansion and upgrade of infrastructure such as new product development and data centers, indicating that Apple's spending related to AI is increasing each quarter, albeit at a slower pace. However, some of this capital investment is not only for artificial intelligence but also for Apple's other businesses.

Compared to large tech peers such as Microsoft, Google, and Meta, Apple's growth in AI-related capital expenditure appears very modest. Apple's large tech peers are investing heavily in the construction and significant expansion of massive data centers centered around artificial intelligence, with core spending focused on purchasing NVIDIA AI GPUs For example, according to the latest statistics from FactSet, Microsoft's capital expenditure in the quarter ending in June reached a staggering $13.87 billion, a significant increase of 55% year-on-year. Alphabet, Google's parent company, saw an astonishing 91% increase in expenditure, reaching $13.19 billion. Meta, Facebook's parent company, experienced a growth of approximately 31%, with quarterly expenditure reaching $8.3 billion as of June. While the expenditure level of Meta is relatively small compared to other tech giants, it is still significantly higher than that of Apple.

Apple seems to be playing a different game in AI expenditure compared to the tech giants, as evidenced by Apple's decision not to follow the trend of major tech companies investing heavily in purchasing NVIDIA AI GPUs.

Apple revealed this week in a technical paper that the company has opted to lease a relatively small and much cheaper Google TPU (Tensor Processing Unit) computing system, instead of deploying NVIDIA AI GPUs on a large scale like other tech giants for training artificial intelligence models. For the initial computing resources required by Apple Intelligence and cloud-based AI inference computing power, Apple plans to utilize its in-house server AI chips later this year to support and cover extensive AI inference computing power. Additionally, Apple is renting cloud capacity from Amazon, Google, and Microsoft.

According to well-known Apple leaker Mark Gurman, Apple will deploy its in-house high-end AI chips in cloud computing servers to handle cutting-edge artificial intelligence cloud computing tasks on Apple devices, while simpler AI-related functions will be processed directly on devices such as iPhone, iPad, and Mac, using AI large models. Apple is positioning itself in the generative AI field by combining "edge-side + cloud computing" strategies.

As Apple builds and expands its AI infrastructure, the company may have a cost advantage with its in-house AI chips compared to other tech giants, whether in consumer electronics products like smartphones or cloud server chips. Therefore, the company may not need to spend billions of dollars on third-party AI GPU hardware, such as NVIDIA and AMD AI GPUs.

During an earnings call with analysts, Cook stated: "In terms of AI-related capital expenditures, it is important to remember that we take a somewhat hybrid approach, we do things internally, and we also have some external partners, and capital expenditures will also appear in their respective businesses."

Will Warren Buffett's recent series of divestments be imitated by the market?

Although Buffett's investment strategy—long regarded by the market as the "Oracle of Omaha," relying on incredibly strong capital market forecasting abilities—has almost avoided all stock market crashes globally. However, it is worth noting that Berkshire Hathaway's stake in Apple in recent years has become so significant that some investors are beginning to question whether the company must divest to balance its stake. It is important to note that even after nearly halving its Apple holdings, Apple remains the largest single holding under Warren Buffett's Berkshire Hathaway. **

"If you hold such a large-scale position, you can reduce some risks of concentrated holdings and gain some profits through reducing the position," said CFRA research analyst Cathy Seifert. "Despite significantly reducing Apple, their portfolio remains quite concentrated," she added.

This is not the first time Berkshire Hathaway has reduced its holdings in Apple. At the annual meeting in May, the company revealed that its position had decreased in the first quarter of this year. At that time, Buffett hinted to investors that the impact of U.S. taxation may play a significant role in Berkshire's position reduction.

It is worth noting that as Berkshire Hathaway's latest announcement was released, investors' concerns about a future U.S. economic recession have significantly increased. Especially, the lower-than-expected non-farm payroll data released last Friday and the much higher-than-expected unemployment rate have triggered widespread recession concerns, worrying that the Fed may wait too long to start lowering interest rates. This ultimately led to the Nasdaq 100 index entering a technical correction, the Chicago Board Options Exchange Volatility Index (VIX) approaching 25, and a global "recession trade" wave seems to have arrived - betting heavily on traditional defensive sectors such as healthcare and gold that benefit under economic recession.

The U.S. unemployment rate in July unexpectedly rose to the highest level in nearly three years, finally triggering the "Sam Rule" with an astonishingly accurate prediction rate of 100% for an economic recession. The U.S. unemployment rate unexpectedly climbed to 4.3%, surpassing economists' expectations of 4.1%, rising for four consecutive months. Coupled with previously announced extremely weak economic data such as the ISM U.S. Manufacturing PMI, all indicate that the deterioration of the U.S. economy is much faster than market expectations, potentially making the Fed more determined to cut rates in September, with traders starting to bet that the rate cuts in September and November could be as high as 50 basis points, rather than the previously expected 25 basis points.

Stocks of large tech companies including Microsoft, Amazon, and Google's parent company Alphabet have all significantly declined from their historical highs set in early July. The total market value of the Nasdaq 100 index component companies decreased by over $3 trillion during this period, with both Nvidia and Tesla seeing their total market value decrease by over 20%. In comparison, the stock price of tech giant Apple has only dropped by about 6% from its all-time high Brian Moelberry, a portfolio manager at Zacks Investment Management, said, "Berkshire Hathaway may be like an increasing number of investors, hoping to see more evidence that Apple's artificial intelligence investments will lead to actual performance growth, and not believing that this will happen fast enough."

Data compiled by institutions shows that as of mid-July, Apple's expected P/E ratio is about 33x, 11 percentage points higher than the broader S&P 500 index valuation, a gap that last appeared after the COVID-19 pandemic and the financial crisis. Despite the valuation premium, Moelberry still believes that holding Apple stock is meaningful for investors. "Their balance sheet remains healthy, and their profit growth is expected to outpace the overall market," the portfolio manager said.

Other Wall Street analysts, including senior analyst Dan Ives from Wedbush, point to Apple's brand loyalty and future growth expectations - he believes Apple is at the forefront of a significant device upgrade cycle that will drive accelerated growth in 2025 and 2026.

Ives said, "While some may interpret this as concerns about holding confidence, Apple has just delivered a strong quarterly report, and a super consumer electronics cycle driven by artificial intelligence is expected in the future. We believe it is not yet time to hit the exit button."

Of course, Apple is not the only stock Berkshire Hathaway has recently reduced its holdings in. Under Buffett's leadership, the institution has been reducing its holdings in U.S. bank stocks, reducing its stake by as much as 8.8% since mid-July. Some investors insist that this indicates Buffett does not see any fundamental issues with these two companies, but is betting on weakening U.S. consumer spending and the overall U.S. economy.

"Buffett may think we are likely to fall into an economic recession, so he is now tightening cash in the high-interest rate environment in the U.S., so that he can later buy back some high-quality companies' stocks at a lower price," said Jim Awad, Senior Managing Director at Clearstead Advisors.

Buffett's significant reduction in U.S. bank and Apple holdings is widely seen by institutions as the "Oracle of Omaha" betting on an imminent U.S. economic recession, hence choosing to hold record cash in the still high-interest rate environment in the U.S. Buffett has always favored taking profits ahead of events or at the first signs of a company's performance decline, while making appropriate adjustments when the market environment changes to ensure steady and sustained growth of investments.

Bank stocks, in particular, tend to underperform during economic downturns. Expectations of rate cuts often reflect Federal Reserve officials' concerns about economic slowdown or potential recession. The banking industry is highly cyclical during economic cycles, with economic slowdown potentially leading to decreased loan demand, increased default rates, and other issues that can affect overall bank performance. The "Oracle of Omaha" Buffett may believe that with the rising expectations of rate cuts, the risks in the banking industry may increase due to the economy entering a downturn, necessitating a reduction in exposure to bank stocks