Warren Buffett’s Berkshire Hathaway sold 389 million shares of Apple in the second quarter. This reduced its stake by half. The company also bought shares in Ulta Beauty, a lesser-known company.
Apple reported good financial results in the third quarter of fiscal 2024. Revenue increased by 5% to $85.8 billion. Net income rose by 11% to $1.40 per diluted share.
Apple is a big player in several consumer electronics markets. These include personal computers and smartphones. However, Apple is facing several challenges.
A new law in Europe requires Apple to support third-party app stores on its devices. This might reduce its power. Apple’s market share in China has also decreased a lot.
It is no longer one of the top five vendors there. iPhones make up 45% of Apple’s total revenue. But the company has not sold more iPhones than it did in early 2022.
Apple has not launched a new popular product since AirPods in 2017. This raises concerns about its ability to grow sales by more than mid-single digits. Earnings may grow faster due to stock buybacks.
But this reliance suggests limited prospects. Wall Street expects Apple’s earnings to grow at 8.6% per year over the next three years. Yet its current valuation of 33.5 times earnings seems too high.
Buffett’s Apple stake reduction
This sky-high valuation may be why Warren Buffett reduced Berkshire’s stake in Apple. Ulta Beauty runs more than 1,400 stores across the United States.
It sells about 25,000 products from around 600 brands. These range from mass-market items to high-end goods. In recent years, Ulta has become the leader among U.S. beauty retailers.
It has done this through good marketing, loyalty programs, e-commerce investments, and opening new stores. However, Ulta reported disappointing financial results in the second quarter. Revenue increased by less than 1% to $2.6 billion.
Gross margin went down by 100 basis points. GAAP earnings declined by 11% to $5.30 per diluted share. Management lowered its outlook for the full year.
An analyst said Ulta’s weak performance was due to competition from Sephora stores opening in Kohl’s locations. The analyst remains optimistic about Ulta’s prospects. He expects the company will expand its store base by about 20% over the next decade.
He also thinks it will achieve same-store sales growth of about 4%. Ulta’s stock is priced more reasonably than Apple’s. Wall Street expects earnings to increase by 9% per year over the next three years.
This gives Ulta a PEG ratio of 1.6, which is only a little higher than its three-year average of 1.5.
While Ulta faces challenges, its valuation appears fair and its growth prospects are promising. Investors might consider following Berkshire’s lead. They could start with a small position in Ulta and add to it when the market pulls back.
It’s worth noting that Berkshire Hathaway still owns a lot of Apple stock. It represents 30% of its stock portfolio, down from 51% the previous year.
