Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 5
due to (of all things) the Apple stake. Oh the horrors...
https://apple.news/AEz-Y548fQf2fZSjUKH-X1AWarren Buffett's slice of Apple is looking juicier than ever, following a nearly 50% surge in the technology titan's stock price this year.
Buffett's Berkshire Hathaway owns about 916 million shares, giving it a 5.8% stake in Apple worth almost $180 billion today. The famed investor's conglomerate purchased the vast majority of those shares for $31 billion, meaning it's scored a nearly six-fold profit on paper (assuming it didn't pare the position last quarter.)
Apple stock has rallied to record highs this year alongside other Big Tech stocks
Apple is by far the most-valuable holding in Berkshire's stock portfolio, and Buffett's company is Apple's biggest single shareholder. Indeed, UBS analyst Brian Meredith estimated in a research note this week that Berkshire's portfolio appreciated by 10.1% between April 1 and July 16 this year ' and 75% of that gain was due to its Apple position.
Meredith suggested Berkshire's stock gains have raised its intrinsic value by 5%, meaning its shares now trade at a 15% discount to the company's underlying worth.
Of course, Buffett aims to invest in high-quality businesses for the long term, and cares little about short-term swings in stock prices. Yet he's defended the massive size of his Apple bet ' it's worth nearly a quarter of Berkshire's $750 billion market capitalization ' earlier this year, saying it's a "better business than any we own."
The Berkshire chief has also championed Apple's focus on doing a few things well, praised CEO Tim Cook as an exceptional leader, and underlined how indispensable products like iPhones and MacBooks are to their users.
No. of Recommendations: 3
So if I'm not mistaken we have been mandated here to discount Berkshire based on the over-valuation of Apple now for some time, trillions of market value ago. Yet the Apple itself was probably the largest segment of the intrinsic value gain for all the time we were required to discount it...because of course it was surely headed far lower based on extreme over-valuation.
May be...that is possibly short of Jack Welch promoting GE at the end of his CEO term, the largest analyst "miss" as to market value relative to Mr. Market, inflation, and on down to Berkshire itself as an entity, in analyst history.
No. of Recommendations: 35
"So if I'm not mistaken we have been mandated here to discount Berkshire based on the over-valuation of Apple now for some time, trillions of market value ago. Yet the Apple itself was probably the largest segment of the intrinsic value gain for all the time we were required to discount it...because of course it was surely headed far lower based on extreme over-valuation."
No one can mandate that anyone else do anything on this board. We offer our opinion, people are free to take it or leave it. I personally find it valuable to see analysis done in detail. Saves me a huge amount of work and so I value their posts regardless of whether I agree with them on all the assumptions or details. But its a mistake to say that someone on the board is forcing other people to think a certain way or to agree with all their assumptions.
No. of Recommendations: 23
So if I'm not mistaken we have been mandated here to discount Berkshire based on the over-valuation of Apple now for some time, trillions of market value ago. Yet the Apple itself was probably the largest segment of the intrinsic value gain for all the time we were required to discount it...because of course it was surely headed far lower based on extreme over-valuation.
I sure hope you don't think I said those things about Apple overvaluation!
FWIW, my estimate of the value of Apple is up 80% in the last three years.
Same rise and same trajectory as the (smooth) earnings per share, which makes more sense to me than imagining that fickle market prices mean much.
The fair market cap implied by a constant multiple of (smooth) earnings, as I do it, is up by over $1 trillion in that time.
The earning power is up a lot. Not as much as the stock price, though.
Their earnings are only very slightly cyclical.
Yet seven years ago the market thought the right multiple was under 10 times earnings, and 2.5 years ago thought the right number was well over 40.
I suspect neither figure was correct, and I also suspect the correct multiple won't have changed much.
These days, the difference between those two equates to over $3 trillion in market cap changes just from short term price movements... pretty large error bars for those who use market cap.
To me, that's too much statistical noise to get a meaningful signal.
Instead, it makes sense to value Apple the same way as I value the railroad or the utilities: adjust after-tax earnings for cyclicality if needed, then apply a fixed multiple.
Different multiples for different kinds of businesses, but each one constant through time.
Jim
No. of Recommendations: 4
Instead, it makes sense to value Apple the same way as I value the railroad or the utilities
I don't think it makes sense to value Apple the same as a railroad. Based on what you wrote previously, Apple, at a current P/E of 33, is wildly "overvalued", because you claimed all P/E ratios must eventually fall to a more reasonable value of 15.
In fact, you wouldn't have touched AAPL back in September of 2018, when it's P/E ratio climbed to a lofty value of 18, thereby making it "overvalued" according to your measuring stick. However, people who followed the Peter Lynch philosophy to "buy what you know", having bought iPhones themselves, and watched their friends upgrade to a new $800 phone every chance they got - they would have bought Apple shares at $55 back then, and enjoyed a return of 450% in less than 5 years.
Apple is another example of a megacap tech company that can unlock billions of dollars of new revenue streams by leveraging their current technology. For example:
1. They take 30% of the revenue of every app sold in the App Store, so what will the revenue be when a flood of new Generative AI apps hit the market?
2. How much will they make if they release a mixed reality headset?
3. Are they working on Autonomous Driving software or even a new EV?
Because you don't know what future revenue streams these could bring, your P/E or "fixed multiple" analysis (which, yes, could be applied to a railroad) won't work with Apple.
No. of Recommendations: 32
I don't think it makes sense to value Apple the same as a railroad. Based on what you wrote previously, Apple, at a current P/E of 33, is wildly "overvalued", because you claimed all P/E ratios must eventually fall to a more reasonable value of 15.
No, I never claimed any such thing.
I've never called it wildly overvalued. And I have never suggested a multiple of 15 for them.
Apple's normal market multiples of (smooth) earnings have generally falling the range 9 to 45 in the last decade. That's a pretty wide range.
Consequently, and quite reasonably, I don't think that using the current market value gives much of a clue to what it's actually worth, so I pick a constant multiple of cyclically adjusted earnings.
If your main interest is the rate of change of value over time as I am, rather than a specific level, then it doesn't actually matter much what multiple you use.
But for whatever it's worth, I usually use 21 times cyclically adjusted earnings for Apple. That's pretty arbitrary, but the specific number doesn't matter much.
The key thing is realizing that value rises quite closely with the trend of earning power, and is not particularly correlated with the market price.
After all, the price could fall by 70% tomorrow and the multiples would still be in the range seen in recent years, but a share wouldn't be worth any less.
Note, the 21 I usually use is for the purposes of tracking a conservative value metric through time. (historically that's pretty generous)
I would rather be pleasantly surprised than unpleasantly surprised.
The firm may well be worth more than that, but (as I have so frequently mentioned, verbatim) I am merely unwilling to ASSUME that is the case.
That is not even vaguely similar to suggesting that it's wildly overvalued, or that I think it's worth only 15 times earnings, neither of which have I ever said.
you wouldn't have touched AAPL back in September of 2018, when it's P/E ratio climbed to a lofty value of 18, thereby making it "overvalued" according to your measuring stick.
Not sure what you're smoking there...thinking about anther poster perhaps?
I think it's a better buy when it's relatively cheap (like my buy suggestion in 2013) than when it's relatively expensive, but that's true for everything.
As prices go up, the rewards on offer get smaller.
As mentioned, I've increased my estimate of the value of a share by about 80% in the last three years.
The reason is that the (smooth) earnings per share are up that much, so it seems like a pretty good guess for rock and roll purposes.
The market price might be up or down since then--it doesn't really matter much to me, since it contains so little information for someone trying to value them.
Because you don't know what future revenue streams these could bring, your P/E or "fixed multiple" analysis ... won't work with Apple.
Why not?
What, then...you think that each dollar of cyclically adjusted earning power at Apple is worth more and more each year because they are so wonderful? An ever expanding multiple of current earning power?
How do you arrive at that conclusion?
True, it's better to estimate the entire future trajectory of real earnings in detail, but that's pretty unknowable for mere mortals. We can guess how long it will last and at what levels, but only guess.
Without making those estimates in detail, which probably wouldn't improve accuracy at all, an adequate value proxy is much better than no value proxy. A fixed multiple of (smooth) earnings is good enough.
For so long as the the real earnings are going up, at a rate in the same sort of range, and for a comparable length of time into the future, the intrinsic value pretty much tracks a fixed multiple of the current current cyclically adjusted earning power.
The same is true for any company with a substantial barrier to competitive entry that it is reasonable to value using EPV. Different multiples for different firms with different future prospects, of course.
Jim
No. of Recommendations: 5
I ran a conservative back of the envelope on Apple and have come up with the following.
Average earnings of $5 per share growing at 10% for 10 years equates to $12.97 a share with a terminal multiple of 20 = $259.
Which equates to a 3% return pa from here. Another KO situation and lower returns going forward at current valuations I think.
No. of Recommendations: 7
And Berkshire?
231 @ 9% BV growth for 10 yrs = 546 x 1.35x bk terminal (5 year average) equates to $737 and 7.92% compounded from current value.
No. of Recommendations: 18
And Berkshire?
231 @ 9% BV growth for 10 yrs = 546 x 1.35x bk terminal (5 year average) equates to $737 and 7.92% compounded from current value.
Sounds like a sane notion.
I like after-inflation numbers, since those are what affect how much wealth you get.
My own multi-method valuation metric, a mix of my "two and a half column" calculation and a pinch of book per share, has risen at inflation + 7.3%/year or more for all sorts of time periods ending now.
The slope of the long run trend is 8.25%, so 7.3% represents a bit of a slowdown.
Projecting that 7.3% real growth rate out 10 years gives an increase of that value metric of 202%.
Multiply the current value of that metric by 2.02 and you get a target future value of the metric.
Multiply that future number by the average multiple of that metric seen since 2008 to get a target future market price in today's dollars. (almost spot on a million bucks in today's money with CPI at 305.11).
Divide that by today's price and annualize it, and I get a return target of inflation + 6.48%/year.
But the value metric is probably about to pop upwards as soon as the Q2 statements come out, so there is a pinch of conservatism in it.
Wild guess, that bump alone will add around 1/3% per year to the return forecast because the starting point will be seen to be cheaper.
If you take the difference between your nominal number and my after-inflation one, it looks like collectively we foresee breakeven inflation of only 1.44% : )
I expect inflation to average somewhat more than that, so my nominal forecast return would be a bit higher than yours.
Jim
No. of Recommendations: 13
Threads like this always allow me to torture my wife with the factoid that had we stuffed our original 500 shares of AAPL into the sock drawer and did nothing, that $10,000 today would be 112,000 shares, worth north of $21,0000,000.
She always smacks me side the head!
Joe
No. of Recommendations: 14
One of the great things Buffett has done for his shareholders is help keep Berkshire's share price rational.
There are many stories of investors exiting great businesses too early and breaking long term compounding runs, with life changing effects.
It's not so easy to hold for multiple decades. Holding Berkshire has been quite easy, in part because most of the time it seems undervalued, or fairly valued. Some of that is due to honest and conservative communications from Buffett. Long may it continue.
No. of Recommendations: 5
"One of the great things Buffett has done for his shareholders is help keep Berkshire's share price rational. "
makes me think of a bumper sticked in the Bay Area post 2000"
"Please God, one more bubble"
No. of Recommendations: 19
"But its a mistake to say that someone on the board is forcing other people to think a certain way or to agree with all their assumptions."
You are being generous by saying it is a mistake. It isn't a mistake. It is an outright dishonest characterization of what another poster has said. You see he is unable to argue against what the other poster has actually said, so he will just dishonestly mischaracterize the arguments and argue against the mischaracterizations instead.
He is a bit jealous of the attention other posters get.
He forgot what Charlie Munger has said about jealousy being the worst of the 7 deadly sins because you get nothing out of it.
