The big news in Apple's earnings report; Warren Buffett's best investment is one of his riskiest; Activist and value investors are looking at Japan; Value Investing Seminar in Italy in two months

1) Considering its size and valuation, I wasn't impressed with tech bellwether Apple's (AAPL) second-quarter earnings. But its stock is up sharply today for other reasons...

The company reported second-quarter earnings yesterday after the close (you can see the press release here and the financial statements here). Below are some quick initial highlights:

• Revenue declined for the fifth time in six quarters, though the 4.3% year-over-year drop to $90.8 billion was slightly above expectations of right around $90 billion.

• The decline was led by a 10% year-over-year drop in iPhone revenue, which accounts for half of Apple's total sales. It was the biggest decline in this segment since the pandemic, due to difficult year-over-year comparisons.

• High-margin services revenue, accounting for 23% of total sales, jumped 14% year over year to an all-time high.

• Earnings per share ("EPS") came in at $1.53, slightly above expectations of $1.50.

Overall, it was a pretty uninspiring report for a company with a $2.7 trillion market cap, trading at 7 times revenue and 27 times trailing earnings going into the report.

So why were AAPL shares up as much as 8% earlier this morning? A few reasons...

The bar was low: Apple's stock was down 10% this year going into earnings, by far the worst of its mega-cap tech peers.

The company also guided to low-single-digit revenue growth next quarter – easing investors' concerns about another decline.

Lastly – and the reason that's drawing the most attention – Apple announced an additional $110 billion in share repurchases, underscoring its status as the greatest cash-generating machine of all time.

The company reported net income last quarter of $23.6 billion and generated $22.7 billion of operating cash flow, offset by only about $2 billion in capital expenditures.

That gave it the ability to pay out $3.7 billion in dividends and buy back $23.5 billion in stock – coming in at $87.4 billion over the past year and dropping the diluted share count by 2.4%.

Those numbers are simply mind boggling.

I think Apple's stock will do fine going forward, but the company is simply too big and the valuation too high for it to outperform... so the stock doesn't look like a buy at these levels.

Among the mega-cap tech stocks, I like Amazon (AMZN), Meta Platforms (META), and Alphabet (GOOGL) better (see my April 26 and May 1 e-mails for coverage of those companies' earnings).

2) Ah, but what if you own Apple stock and it has risen to be a super-sized position?

This is a high-class problem every investor should hope to have – and the exact one faced today by Berkshire Hathaway's (BRK-B) Warren Buffett, the greatest investor of all time.

Here's a new Wall Street Journal article that explores this: Apple Is Buffett's Best Investment. It's Also Now One of His Riskiest. Excerpt:

In 2016, Buffett made perhaps the most surprising bet of his career. That year, Berkshire Hathaway, the company he runs, began buying up shares of Apple – the exact kind of stock Buffett and his longtime partner, Charlie Munger, had long avoided...

Yet working with protégés, Buffett soon transformed into an Apple bull in a remarkable about-face. After an initial purchase of nearly 10 million shares worth about $1 billion in 2016, Berkshire added to its holdings later that year and then stepped up its buying in 2017 and 2018, spending about $36 billion on the stock over those years. Berkshire later trimmed some of those holdings.

By the end of the third quarter of 2018, Berkshire's Apple stake represented about a quarter of its entire investment portfolio. In dollar terms, it was twice as large an investment as Buffett had previously made.

And as the article continues, that investment paid off massively:

Today, Berkshire's 5.9% stake in Apple is worth about $157 billion, even though Apple has fallen lately. Berkshire is sitting on about $120 billion in paper gains, likely the most money ever made by an investor or a firm from a single stock. Nothing in Buffett's long career comes close. Apple stock represented nearly 50% of Berkshire's stock portfolio at year-end.

Berkshire has scored an annualized return of more than 26% from Apple, including dividends, topping a gain of 12.9% for the S&P 500 during the same period, according to a calculation by Cheviot Value Management, a Los Angeles-area investment firm.

If anyone tells you Warren Buffett has lost his touch in his old age (he's 93), just point to this line: "Berkshire is sitting on about $120 billion in paper gains, likely the most money ever made by an investor or a firm from a single stock." Wow...

That said, does it make sense for Buffett to continue to hold 42% of Berkshire's $375 billion stock portfolio in one stock?

For most investors, probably not. But in this particular case, I'm OK with it.

Apple is a juggernaut and its stock will likely at least match the S&P 500 Index for another five or 10 years.

And if Buffett sold, Berkshire would have to pay taxes – and find another place for the money, which isn't easy these days. And Berkshire's Apple stake of $157 billion (as of yesterday's close) is only 18% of the company's $867 billion market cap.

3) The WSJ also has a new article about another one of Buffett's big winners: Elliott and Warren Buffett Are Now Both Bullish on Japan. Excerpt:

Activist and value investors are converging on Japan. The smart money may be onto something: With U.S. shares suddenly under pressure from high rates again, hitching a ride on a long-term, structural trend like Japan's corporate-governance reforms may make good sense.

U.S. hedge fund Elliott has built a stake in Sumitomo, one of the Japanese trading companies Warren Buffett has invested in, according to a person familiar with the situation. Shares of Sumitomo jumped 10% this week after Bloomberg first reported the news.

Elliott isn't the only one. Berkshire Hathaway, Buffett's investment flagship, owns an 8.3% stake in the company, after raising its stake last year. He has made a killing since he first invested in five Japanese trading companies in 2020. Sumitomo's share price, for example, has more than tripled during the period.

You can also point Buffett skeptics to this...

It's astounding that an 89-year-old – Buffett's age when he made this investment – was still learning and expanding his circle of competence enough to make this unusual investment.

What a lesson in the importance of being a lifelong learner!

4) As I head to Omaha, Nebraska today for my 27th consecutive Berkshire Hathaway annual meeting, I want to remind readers to join me at another wonderful gathering of value investors...

As regular readers know, my friend Ciccio Azzollini and I will soon be hosting – for the 20th time! – our Value Investing Seminar in Trani, Italy. It's happening just two months from now on July 4 and July 5.

We limit the seminar to 50 attendees, who fly into the nearby Bari Airport. Many of them share their latest thinking on where to find the best opportunities and outline their current favorite investment idea(s).

As I've said previously about this event, it's fun, educational, and a great addition to any European vacation! You can learn more and register right here.

Here's a picture of Ciccio and me with the lovely port of Trani in the background:

And here's what our friend Guy Spier of Aquamarine Capital posted about the seminar a couple years ago:

I hope to see you there!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.