Buffet Disposes of Apple Shares, Investing in Restaurant Stock that Surged by 3100% Post-IPO Debut
Warren Buffet allegedly oversees around 90% of Berkshire Hathaway's (BRK.A -0.39%, BRK.B -0.56%) equity securities portfolio, while Todd Combs and Ted Weschler manage the remaining portion. The corporation doesn't disclose the investment manager responsible for each individual transaction, but Buffet likely oversees significant positions such as Apple (AAPL -1.32%).
Despite earlier declaring Apple as the "best business" globally, Buffet sold 100 million shares in the third quarter, consequently reducing Berkshire's stake by 25%. As of September 30, Apple still ranked as Berkshire's largest holding, but Buffet has now disposed of over 615 million shares throughout the previous four quarters.
Simultaneously, Berkshire established a minuscule position in Domino's Pizza (DPZ -0.69%) during the third quarter. The stock has soared 3,100% since its initial public offering (IPO) in July 2004, but it has struggled lately. Over the past three years, shares have decreased by 21%, despite the S&P 500 increasing by 28% during the same period.
Here's what investors should be aware of regarding Apple and Domino's Pizza.
Apple: The stock Berkshire Hathaway divested in the third quarter
Apple has established a strong brand reputation and pricing power due to its technical prowess. Its range of consumer electronics products relies on proprietary software that ensures a smooth user experience across devices, and customers are willing to pay premium prices for this convenience. During the third quarter, the average iPhone price was almost thrice the average Samsung smartphone price.
Apple holds a substantial presence in numerous consumer electronics markets, including dominance in smartphones (in terms of sales). In recent years, the company has expanded its focus beyond hardware, offering ancillary services such as App Store downloads, iCloud storage, and Apple Pay, allowing it to more efficiently monetize its expansive user base of over 2.2 billion active devices.
In the fourth quarter of fiscal 2024, Apple reported moderately positive financial results, with revenue growth of 6% driven by double-digit growth in the services segment, and mid-single-digit growth in the Mac, iPad, and iPhone segments. Concurrently, non-GAAP earnings increased by 12% to $1.64 per diluted share.
Apple remains a robust company, but even the best company isn't worth purchasing at any price. Apple's P/E ratio has risen from 26 in April to 42 in December, with no significant catalyst. Yes, it recently introduced Apple intelligence, a suite of AI capabilities for newer iPhones and MacBooks, but it hasn't sparked the predicted upgrade cycle as anticipated by many analysts yet.
The current P/E multiple appears particularly expensive because analysts expect Apple's earnings to increase at a 10% annual rate during the next three years. In my opinion, this makes the stock excessively overvalued at its current price, and Buffet made a sound decision in selling shares. However, certain Wall Street analysts disagree, with Dan Ives at Wedbush predicting that Apple could become a $5 trillion company within 18 months.
Domino's Pizza: The stock Berkshire Hathaway purchased in the third quarter
Domino's is the world's leading pizza company, measured by both sales and number of stores. The company delivers one out of every three pizzas in the U.S., according to The Wall Street Journal. Regular promotions and the recent reintroduction of its loyalty program have aided Domino's in establishing a reputation for offering better value than its competitors, such as Papa John's International and Pizza Hut (operated by Yum! Brands).
Due to these favorable circumstances, Domino's has been more likely to report positive same-store sales growth in recent years. In fact, it has reported growth in seven consecutive quarters despite challenging macroeconomic conditions, characterized by high inflation and rising interest rates, which have made consumers particularly selective. In contrast, Papa John's and Pizza Hut have experienced descending same-store sales in four of the past seven quarters.
In the third quarter, Domino's reported mixed results. Revenue increased by 5% to $1 billion, missing the 7% growth that analysts expected. However, GAAP net income remained steady at $4.19 per diluted share, surpassing the 13% decline that analysts had projected. The company also opened a net total of 72 stores during the third quarter, bringing its total store count above 21,000.
CEO Russell Weiner informed analysts during the third-quarter earnings call, "I remain confident that we will deliver U.S. same-store sales growth of 3% or more annually. And that's why I anticipate Domino's to continue gaining market share." Domino's also reaffirmed its guidance for "approximately 8% annual income from operations growth" through 2028.
To that end, analysts expect Domino's earnings to increase at a rate of 8% during the next few years. The company's guidance and Wall Street's projections might be conservative, given that Domino's expects a rebound in international sales in 2026, but the stock remains expensive at its current valuation of 26.6 times earnings. In my opinion, investors should wait for a more opportune entry point.
After selling a significant portion of Apple shares, Warren Buffet might be looking for alternative investment opportunities in the finance sector. Berkshire Hathaway's decision to invest in Domino's Pizza could be an indication of Buffet's interest in diversifying the company's portfolio beyond technology stocks.
Given Buffet's reputation for identifying undervalued stocks, it's worth considering whether Domino's Pizza's current valuation represents a potential buying opportunity for long-term investors who are interested in the retail or food service sector.
