A couple of weeks back, I wrote about the potential lost profits from Warren Buffett’s sale in the second quarter of Apple (AAPL). As most are now aware, the Oracle of Omaha parted with some 389 million shares of Cupertino’s finest, reaping massive gains in cutting Berkshire Hathaway’s ownership of the iPhone maker to 400 million shares.
To be sure, it is tough to complain about the $23.875 billion in investment gains realized by Berkshire during Q2, with Apple accounting for the lion’s share of those winnings. However, Buffett’s decision to cash in a ton of his Apple chips, supposedly for tax reasons, has as of this writing provided another reminder that the only problem with market timing is getting the timing right.
After all, Apple’s average closing price in Q2 was $186.49, which is well below the $226.51 at which the stock closed on August 20. If I assume that average price for Berkshire’s sales, the paper losses, subject of course to market fluctuation, could be $40.02 per share—or nearly $16 billion in lost additional profit!
Precise information on what Buffett actually fetched for the sale remains unavailable, but we know that Berkshire sold $77.1 billion worth of stock in total during the quarter, based on the company’s second quarter 10-Q regulatory filing. The Q2 13-F regulatory filing out last week shows that Berkshire also parted with 2.65 million shares of Capital One Financial (COF), 4.4 million shares of Chevron (CVX), 633 thousand shares of Louisiana Pacific (LPX), 7.5 million shares of Paramount Global (PARA), 570,000 shares of T-Mobile (TMUS) and 6.1 million shares of Snowflake (SNOW).
Of course, those positions might have fetched around $2 billion in total proceeds, so perhaps a better estimate of Buffett’s Apple average sale price would be $192.88, where the math works out to $75.1 billion divided by 389.4 million shares. Given the $226.51 closing price on August 20, a better estimate of the money taken off the table prematurely would be $13 billion!
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Obviously, the stock could have moved in the other direction, and there is still a 400-million-share bullish Berkshire wager on AAPL. Also, I can’t blame the Oracle for diversifying Berkshire’s holdings as I have done the same with my own position on more than a few occasions over the last two decades.
Time will tell whether Buffett deems the ‘24 Apple sale as one his biggest laments.
Ignoring his A-B-C’s
Back in 2017, Buffett and his right-hand man Charlie Munger lamented that they had missed Google, now known as Alphabet (GOOG).
At the Annual Shareholders Meeting that year, Munger said, “But you know, if you ask me in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So, I would say that we failed you there and we were smart enough to do it and didn’t do it.”
Buffett added, “We were their customer very early on with GEICO, for example, and we saw—these figures are way out of date—but as I remember, we were paying them $10 or $11 a click (or something like that). And any time you’re paying somebody $10 or $11 bucks every time somebody just punches a little thing where you got no cost at all, you know, that’s a good business unless somebody’s going to take it away from you.”
Given that GOOG shares have gained some 270% since that 2017 Berkshire confab, or more than 19% per annum, missing Alphabet would likely be an even bigger lament today.
However, the stock has retreated sharply in price from recent highs, so I think it fine time for Buffett or the average Joe again to be considering a purchase.
Shares fell in early-August after the Department of Justice notched a win in court against the company’s leading search engine, successfully arguing that Google illegally acted as a monopolist when it came to its search engine deal with Apple.
U.S. District Judge Amit Mehta wrote in his opinion, “Google is a monopolist, and it has acted as one to maintain its monopoly. It has violated Section 2 of the Sherman Act. Specifically, the court holds that (1) there are relevant product markets for general search services and general search text ads; (2) Google has monopoly power in those markets; (3) Google’s distribution agreements are exclusive and have anticompetitive effects; and (4) Google has not offered valid procompetitive justifications for those agreements. Importantly, the court also finds that Google has exercised its monopoly power by charging supracompetitive prices for general search text ads. That conduct has allowed Google to earn monopoly profits.”
The 277-page ruling continued, “Other determinations favor Google. The court holds that (1) there is a product market for search advertising but that Google lacks monopoly power in that market; (2) there is no product market for general search advertising; and (3) Google is not liable for its actions involving its advertising platform, SA360. The court also declines to sanction Google under Federal Rule of Civil Procedure 37(e) for its failure to preserve its employees’ chat messages.”
The antitrust victory for Justice is significant if it sticks, but I think it’s likely to take many more years of appeals to finalize anything consequential. And there is no way of knowing what the potential remedies might be.
I might argue that the case is similar to the anticompetitive hand-slap Microsoft (MSFT) received from the European Union related to making Internet Explorer (IE) the primary preinstalled web browser in 2004. IE, like Google Search, was “forced” on users, yet folks still decided it was a better browser even if they had to make the choice vs. having it pre-installed.
I note that the court documents show that Google paid Apple $20 billion in 2022 to be the default search engine in the Safari browser. Obviously, there is value in that arrangement for Google, but is it $20 billion?
The Microsoft case was decided in 2007 and took more than 10 years to settle from the time Sun Microsystems first lodged a complaint in 1998. Not that GOOG will follow the same trajectory, but the case hardly did MSFT in. In fact, from the end of March 2004, Microsoft shares have risen 2,500% including reinvested dividends, though not without periods of treading water and substantial volatility along the way.
With a long way to go before a final outcome is reached, and many analysts thinking an extreme remedy of a breakup of Alphabet would be a positive for shareholders as the sum of the parts might be worth more than the whole, I remain a fan of GOOG.
The shares change hands at just 20 times forward earnings expectations, well below the historical norm, while the balance sheet is loaded with cash and there is even a modest dividend payout to go along with a massive stock repurchase program.
Alphabet (GOOG) remains one of The Prudent Speculator’s largest holdings!
Disclosure: Please note that shares of the stocks mentioned are owned by asset management clients of Kovitz Investment Group Partners, LLC, a SEC registered investment adviser. For a list of stock recommendations like these made in The Prudent Speculator, visit theprudentspeculator.com.
