🍎 Buffett Sells $20B of Apple as iPhone Sales Slump

Plus, Shopify crashes 22% despite strong earnings...

🍎 Buffett Sells $20B of Apple Amid Worst iPhone Sales Slump Since the Pandemic

Before you panic, Apple is still Buffett’s biggest holding (at 39.5% of his portfolio), but given this was Buffett's biggest sale of Apple stock EVER since he first bought the stock in Q1 2016 (selling 13% of his stake), it’s certainly worth talking about.

So let’s peel back that 6.1-inch (diagonal) all‑screen OLED display and look at what’s going on in the inner workings of Blossom’s favorite tech stock...

📱First off, iPhone Sales Are Struggling Big Time

While the pandemic drop was largely due to factory closures, this time deeper factors are at play:

🇨🇳 Troubles in China

Apple struggled in China this quarter, with iPhone sales falling ~7% YoY despite a +6.5% in the overall market for smartphones.

This was largely due to increased competition from Honor and Huawei, who knocked Apple from the #2 spot (by market share) all the way down to #4.

Apple is now only the 4th largest iPhone supplier by market share in China.

🤖 Consumers Waiting for AI and iPhone 16

Apple has been elusive about its AI strategy, building hype for its AI announcements expected this June at the Apple WWDC conference.

Techcrunch believes this silence has played a role in consumers’ decisions to hold off on a new iPhone. The iPhone 16 is also set to launch in the fall, and consumers often hold off when they know a new phone is coming.

But behind all this is a broader problem - a general feeling that Apple just hasn’t been innovating. The recent iPhone upgrades have been minor at best, decreasing the excitement around buying the shiny new gadget. Whether Apple can turn this around with its announcements in June will be an important test.

“More than ever in the past decade, Apple needs new products and solutions”

Thomas Monterio, Investing.com

🌟 But it’s not all bad news…

While Apple is down 1.4% YTD, significantly lagging behind the overall market S&P 500 index, which is up 10.12%, Apple is actually up ~6% since its earnings announcement on May 2. Here are a few reasons why:

💰 Services revenue sets all-time record

  • Apple’s high-margin services revenue (i.e App Store, Apple Pay, iCloud, etc.) increased 11% year over year, offsetting some of the losses from iPhones.

💸 Increased dividend + massive share buyback

  • Apple put some of its massive pile of free cash flow to work, increasing its dividend by 4%.

  • Apple also announced a $110B buyback, the biggest in US history.

“The buyback was an astonishing number. Apple may be acknowledging that they are becoming a value stock that returns money to shareholders rather than a high powered growth stock that needs its cash for R&D and expansion"

Steve Sosnick, Chief Strategist at Interactive Brokers

👴🏻 So Why is Buffett Selling?

Ok, so what about Buffett? Why is arguably Apple’s biggest supporter selling such a big stake in his once favorite holding?

Well, some analysts say it’s just tax loss harvesting, but Daniel Pronk argues that something deeper is at play, and I tend to agree. Here are some key red flags Pronk points out:

  • 🚩 Buffett is a value investor, buying/selling based on whether the company is under or overvalued in the stock market.

  • 🚩 While talking about Apple, Buffett references the Intelligent Investor and reminds us that the markets are there ‘to serve us, not instruct us,’ implying that he is taking advantage of Apple’s overvaluation.

  • 🚩 Apple is indeed trading at ~40% higher than its historical 10-year average price-to-earnings ratio (a general measure of how expensive a stock is).

  • 🚩 Apple’s current Earnings Yield of 3.6% is lower than the 10 Year Bond Yield of 4.5% (which is concerning as bonds as far less risky than tech stocks, so you’d expect a higher yield from Apple as a ‘margin-of-safety’ for the additional risk).

  • 🚩 Buffett has a track record of building up the largest cash piles before the historical market crashes (aka when he believes stocks are overvalued). With the Apple sale, Buffett’s cash position is the largest it’s ever been.

🤖 Can AI Turn Things Around for Apple?

Ok, so that was all very doom and gloom, but personally, I don’t think this means you should dump all your Apple stock and run for the hills (and cleary neither does Buffett, who still holds ~40% of his entire portfolio in the stock).

In April, Apple surged $112B on some minor AI announcements and rumors, so the message is clear: Investors want to see Apple’s AI strategy.

And there are certainly reasons to be optimistic that Apple’s AI strategy could be a game-changer, most notably Apple is closing in on an agreement with OpenAI to integrate its tech into iOS 18, and is rumored to have a ‘flurry of new AI features it’s planning to announce next month.’

So whether Apple is a buy/sell really comes down to how confident you are that Apple can deliver on the AI hype and whether you believe this can turn around the iPhone slump that Apple’s been facing.

💡 Daniel Pronk’s video was an incredible reference for this summary, so if you thought it was insightful, definetely check out Pronk’s book “The Fundamentals of Investing: How to Grow Your Wealth in the Stock Market”.

📊 Pronk also used Stock Unlock to conduct some of the analysis, an awesome tool developed by him and his co-founder Jake Ruth.

💵 Think credit, not duration, in today’s market

Success in fixed-income investing typically comes from managing three key factors: interest rates, credit quality, and liquidity. As risk increases in any of these, we would anticipate an increase in the potential return generated in fixed income.

🤔 Why corporate bonds

Corporate bonds historically offer attractively higher yields versus government bonds due to the inherent credit risk of corporate issuers. Yet, default rates remain minimal, with only three Canadian investment-grade issuers defaulting in the past 25 years.

📈 Capital gain potential

Canadian investment-grade corporate bonds offer an attractive yield premium over government bonds, potentially compensating investors if interest rates remain flat or move higher over time. The opportunity for investors may lie in the income that can be earned from bond yields, combined with capital appreciation potential from holding discount bonds to maturity.

🏦 GuardBondsTM may be the answer!

GuardBondsTM, a suite of funds and ETFs with defined maturity dates, offers investors access to the benefits of Canadian investment-grade bonds held to maturity. Investors may benefit from potentially higher income levels and capital gains from bonds maturing at a par value higher than their purchase price compared to traditional cash-management strategies like GICs and high-interest savings funds.

💡 Why GuardBonds

  • Higher yield potential than GICs and HISA Funds

  • Bonds held to maturity helps to reduce volatility

  • Focus on tax efficiency by investing in discount bonds

*See GuardBonds Disclaimer at the end of the newsletter. Guardian Capital LP is the Manager of the GuardBondsTM funds.

[1] DBRS Morningstar, 2022 Fundamental and Structured Finance Rating Transition and Default Studies, May 02, 2023. https://dbrs.morningstar.com/research/413365/2022-dbrs-morningstar-fundamental-transition-and-default-study

🛍️ Shopify crashes 21% this week after earnings, is it a buying opportunity?

🏆 Shopify is the 3rd most held tech stock in Blossom (and one of my personal positions at 3.4% of my portfolio) - so like me, many of you are likely feeling the pain of its brutal 21% drop this week and wondering whether you should dump your position, load up, or something in between…

🛍️ As a quick refresher, Shopify has helped over 2 million merchants set up and host e-commerce websites and currently powers 10% of e-commerce in the US.

So let’s dive in and find out what’s going on…

🎯 Shopify actually beat earnings estimates

Last Wednesday, Shopify reported it’s Q1 earnings and by most criteria they crushed it, a fact the CEO was quick to point out on CNBC:

  • Revenue: Up 23% to $1.9B (vs expected $1.83B)

  • Adjusted Earnings: 20 cents (vs expected 17 cents)

  • Operating Margin: 10.8%, up from -2.1% last year

  • Free Cash Flow: Up ~3x to $232 million

Shopify also hiked prices by over 30% on its subscription plans this year with limited customer dropoff, demonstrating a strong ‘moat’ and high customer stickiness.

You’re seeing the strongest version of Shopify in our history. The amount of growth drivers we have are larger than we’ve ever had.

Harley Finkelstein, President of Shopify

🚨 But Shopify’s ‘Forward Guidance’ Caused Concerns

While Shopify had an incredible Q1 across almost every metric, a HUGE factor driving a company’s valuation is the expectations for future growth, which is doubly true for a high-growth tech stock like Shopify.

Now that might not seem like a big deal, but with Wall Street expecting 21% growth this year, this slowdown is a step in the wrong direction.

Despite a strong Q1 report, the forecast for margin contraction and lighter than expected Q2 revenue is sounding the alarm bell for investors”

Charlie Miner, Analyst at Third Bridge

 🤔 So, is Shopify a Buy After the Recent Drop?

Overall, analysts seem largely optimistic about the stock after the recent price drop. Trading at $80.58 CAD, or $58.91 USD, analysts set price targets ranging from $63 USD to $87 USD:

  • Baird cut target from $87 to $77, with outperform rating

  • Wells Fargo cut target from $85 to $75, with outperform rating

  • Barclays cut target from $68 to $63, with neutral rating

  • JMP Securities set $80 price target, with outperform rating

  • Piper Sandley kept price target at $63, with neutral rating

💡 A price target represents what the analyst thinks is a fair value for the stock, and so having all the analyst’s targets above the current stock price is a good sign.

Based on all my research, I lean optimistic about Shopify but am already overweighted to tech in my portfolio, so am still deciding whether I should pick up more - you’ll have to wait and see on Blossom 👀

Overall, the Blossom community was relatively pessimistic, with Shopify ranking as the #50 most bought stock and the #30 most sold this week.

👇 Still have questions or want to join the discussion? Check out this great post from @jacobb on Blossom, or dive deeper in his newsletter post where he talks about why he’s doubled his position:

🎙️ Top Discussions this Week

👇 Click to see the full post!

🎥 Enjoying the Weekly Buzz 🐝? Check out my video recaps on Instagram!

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