Warren Buffett Sells Apple Stock and Buys a Restaurant Stock Up 4,270% Since 2005

Key Points

• Warren Buffett's Berkshire Hathaway has sold more than two-thirds of its stake in Apple since Q3 2023, while building a small position in Domino's Pizza.

• Apple in the June quarter reported its strongest revenue growth in nearly four years, but the company is facing headwinds and the stock is expensive.

• Domino's Pizza consistently bests its largest competitors in same-store sales growth, but the stock is not cheap at its current valuation.

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Warren Buffett has cultivated a reputation as one of the greatest investors in American history due to his patient, value-oriented philosophies. Under his leadership, Berkshire Hathaway stock has appreciated nearly twice as fast as the S&P 500 (SNPINDEX: ^GSPC) over the past 60 years.

Buffett and co-investment managers Todd Combs and Ted Weschler once again sold Apple (NASDAQ: AAPL) in the second quarter. In total, they have cut the position 69% since first selling shares in Q3 2023. Meanwhile, Buffett and his understudies bought Domino's Pizza (NASDAQ: DPZ) for the third straight quarter, a restaurant stock that has returned 4,270% since 2005.

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Here's what investors should know about Apple and Domino's.

Image source: Getty Images.

Apple: The stock Warren Buffett's Berkshire Hathaway sold in the second quarter

Apple reported encouraging financial results in the June quarter, beating estimates on the top and bottom lines. Revenue increased 10% to $94 billion, the fastest pace since 2021, because of particularly strong growth in the iPhone and services segments. GAAP earnings increased 12% to $1.57 per diluted share.

The investment thesis for Apple centers on brand authority arising from design expertise that spans hardware and software, which affords the company pricing power. Apple is the sales leader in the smartphone market, and the average iPhone consistently sells for three times more than the average Samsung phone. Its installed base exceeding 2.3 billion devices also positions the company to profit from artificial intelligence (AI), though it has so far failed to do so.

Apple is battling several headwinds. The Digital Markets Act in Europe compels the company to let third-party application stores on its devices, which could reduce services revenue by cutting into sales from its own App Store. Also, an ongoing antitrust lawsuit involving Alphabet could curb Apple's ability to collect fees for making Google the default search engine on its devices, which could trim pre-tax profits by 7%, according to Jefferies analysts.

Apple also has a valuation problem. Wall Street estimates its earnings will increase at 10% annually in the next three years. That makes its current valuation of 35 times earnings look expensive. Those numbers give a price-to-earnings-to-growth (PEG) ratio of 3.5, a material premium to other big technology companies. For instance, Amazon, Nvidia, and Alphabet have PEG ratios below 2. For that reason, I think investors should avoid Apple stock and shareholders should consider trimming their positions.

Domino's Pizza: The stock Warren Buffett's Berkshire Hathaway bought in the second quarter

Domino's reported encouraging financial results in the second quarter. Revenue increased 4% to $1.1 billion due to a combination of 3.4% same-store sales growth and 178 net new store openings. Meanwhile, GAAP earnings fell 6% to $3.81 per diluted share, but that was due to losses on strategic investments. Operating income, the more relevant metric, increased 15% to $225 million.

The investment thesis for Domino's centers on scale and brand authority. It is the largest pizza company in the world as measured by sales, with over 21,500 stores across 90 countries. The company has distinguished itself through technological leadership; as one example, it uses AI to ensure order quality and track consumer sentiment online. In turn, its same-store sales have consistently outpaced its largest competitors.

Domino's in 2023 introduced its "Hungry for More" strategy, a five-year framework targeting 7% annual retail sales growth and 8% annual operating income growth through 2028. The company plans to reach those goals by opening 5,500 new stores, as well as drawing more customers to existing stores through promotional deals and menu innovation.

CEO Russ Weiner told analysts on the second-quarter earnings call, "Our Hungry for More strategic pillars are working together to deliver more sales, more stores, and more profit." He said recently introduced Parmesan Stuffed Crust Pizza has been one of the most popular new menu items in company history. Weiner also mentioned integrations with DoorDash and Uber, which he believes "will build awareness" in the years ahead.

Wall Street expects Domino's earnings to increase at 10% annually during the next three years. That makes the current valuation of 27 times earnings look rather expensive. I think long-term investors can buy a few shares today if they are eager to follow Warren Buffett's lead. But Berkshire has a very small position in Domino's -- less than 1% of its portfolio -- so I suggest keeping the purchase very small.

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Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Domino's Pizza, DoorDash, Jefferies Financial Group, Nvidia, and Uber Technologies. The Motley Fool has a disclosure policy.