Weekend Digest: Buffet Ditches Apple and Buys THIS Instead…

Happy Saturday folks! The markets are closed, and the weekend air is as sweet as ever after coming off an explosive bullish week in the markets. But while most of us saddle up to enjoy a well spent break with our family, friends, and loved ones during this beloved Fathers Day weekend, there’s still quite a bit in motion leading up to next week's trading. 

Which is why in today’s Weekend Digest, we’ll be uncovering why Buffett is ditching Apple and buying THIS instead…

The screaming dip buy that’s sweeping Wall Street…

And finally, Zscaler’s earnings “save” that’s sparked a seismic rally. 

Let’s get to it! 

Buffet Ditches Apple and Buys THIS Instead… 

In March of 2024, Warren Buffett, the legendary CEO of Berkshire Hathaway, made a surprising move that caught the attention of investors worldwide. A man known for his strategic patience and deep understanding of market dynamics, Buffett decided to sell a significant portion of Berkshire’s stake in Apple (NASDAQ:AAPL)—a company that had long been a cornerstone of his investment portfolio. 

Of course, while this decision caught Wall Street off guard, Buffet's choice of direction was not made lightly. Simply put, Buffett (in Buffett fashion), orchestrated a calculative move that illustrated his unwavering commitment to the value investing principles that’s made him the legend that he is. 

The context of this decision is critical. In the first quarter of 2024, Berkshire Hathaway sold 116 million shares of Apple, reducing its holding by 13%. Despite this reduction, Apple still represented a hefty 40% of Berkshire's $336 billion portfolio. Why would Buffett trim his position in a tech giant that had delivered consistent returns? The answer lies in Apple's valuation. While Apple's brand authority, pricing power, and ecosystem of hardware, software, and services create a compelling business model, its valuation had soared to a point where Buffett saw limited upside.

Apple's financials had shown some cracks. In Q2 of fiscal 2024, revenue dipped 4% due to a 10% decline in iPhone sales, despite a 14% rise in services revenue. With a price-to-earnings ratio of 33.1 and an expected earnings growth of 10.6% annually, Apple's PEG ratio stood at 3.1—significantly above its three-year average of 2.4. For Buffett, this premium suggested it was time to reallocate resources.

Simultaneously, Buffett turned his focus inward, investing heavily in Berkshire Hathaway itself. In the first quarter of 2024, he authorized $2.6 billion in share buybacks, building on $9.2 billion repurchased in 2023. This marked the 22nd consecutive quarter of buybacks since Q4 2018. According to Berkshire’s repurchase agreement, Buffett can only buy back shares when he believes they are trading below intrinsic value. This consistent buyback strategy signals Buffett's belief that Berkshire Hathaway is undervalued.

Berkshire Hathaway's attractiveness as an investment is multifaceted. 

Firstly, its insurance subsidiaries generate substantial cash flow from premiums, which Buffet has historically invested to earn strong returns. Over the last decade, Berkshire’s book value per share increased at an annual rate of 11.1%, outpacing the S&P 500’s 10.9%. This growth in book value reflects an increase in intrinsic value, suggesting that Berkshire has been gaining value faster than the broader market.

Secondly, Berkshire's diverse portfolio of wholly owned subsidiaries spans essential industries like insurance, freight rail, energy, retail, and utilities. This diversification provides stability and resilience, allowing Berkshire to outperform the S&P 500 during bear markets. Historical data confirms this: during major market downturns, Berkshire’s maximum declines were consistently smaller than those of the S&P 500, highlighting its defensive strength.

Lastly, Buffett's confidence in Berkshire's business mix underscores its potential. In his latest shareholder letter, he stated that Berkshire should perform slightly better than the average American corporation while operating with less risk of permanent capital loss. This assertion aligns with his belief that Berkshire, with its diverse and essential business operations, is well-positioned to outpace the S&P 500 over the long term.

Reflecting on Buffett’s strategic pivot from Apple to Berkshire Hathaway shares, this is a true masterclass in the value investing thesis that has accumulated an astounding $133.4 billion for the legendary investor.  Which in turn reminds us that investment success lies in understanding intrinsic value and having the courage to reallocate capital when valuations no longer justify the risk. So as we all consider our strategies for the trading week ahead…

It’s worth asking ourselves this: Are we willing to make bold moves based on value even when it means flying in the face of popular sentiment? If not, then what is the anchor that we are basing our investment decisions on? 
 

The Screaming Dip Buy on Adobe? 

Switching over to another story sweeping the street this weekend is the impressive quarterly results of Adobe (NASDAQ:ADBE). If you’re just catching up on this massive earnings beat, Adobe dropped huge news yesterday of a 10.2% year over year revenue increase pushing the company to $5.13 billion. This is of course a new record for Adobe that not only beat expectations, but was largely driven by the seismic performance in the majority of its main segments including: Digital Media that grew by 11%, and Digital Experience with a growth of 9%. 

It’s also worth noting that the company's strategy of gaining more clients and increasing its market presence, along with raising prices, also played a large factor in its boost in revenue.  Which is proof that despite concerns about Adobe's already high prices, the unique value and usefulness of its products kept clients coming back, proving Adobe's top spot in the industry.

Adobe also saw better margins. Both gross and operating margins improved from last year, leading to stronger bottom-line growth. Operating income increased by 16%, GAAP net income by 21.5%, and adjusted net income by 12.75%, all outpacing the revenue growth. This led to a 23% increase in GAAP earnings per share (EPS) and a 14.5% rise in adjusted EPS, with positive cash flow despite reinvestments and share buybacks. The adjusted EPS of $4.48 was $0.10 above the consensus, prompting management to raise their outlook.

The updated outlook was a highlight. Adobe aligned its revenue targets with consensus estimates and set EPS targets to outperform. The company expects both Q2 and full-year EPS to beat analysts' forecasts, giving the market a boost.

Analysts reacted positively to Adobe's results. After lowering their targets earlier in 2024, they upgraded the stock, with JPMorgan Chase moving from Neutral to Overweight, and increased price targets. There were no downgrades. While some new price targets were below the consensus, the overall trend showed a higher low-end range and a rising consensus estimate. The consensus predicts a 35% upside, with many targets suggesting values above the consensus, indicating strong confidence in Adobe's future.

It’s also worth noting that the recent correction in Adobe's stock price over the past two quarters was not without reason. While its AI prospects remain promising, the results, though solid, did not reflect the same boost seen in other prominent blue chip AI players. However, Adobe's inherent quality and value to investors have remained strong, presenting a potentially good buying opportunity.

As of June 14, 2024, Adobe's stock price stood at $525.31, up 14.51%. With a 52-week range between $433.97 and $638.25 and a price-to-earnings ratio of 50.22, Adobe's price target is set at $604.35. The company's better-than-expected Q2 results have spurred analysts to raise their targets, leading the market higher. Based on current trends and market sentiment, Adobe's stock is poised to retest this year's highs and potentially reach new all-time highs by the end of the year. If the next quarters are as strong as Q1, Adobe could see significant gains, potentially 40% to 50% from its current level.

The Earnings Beat That Ignited Zscaler’s 17% Rally 

It’s no secret that Zscaler (NASDAQ: ZS) faced a tough start in 2024, but with its fiscal Q3 results, released on May 30, it officially marked a significant transformative turnaround in stock performance. The day after the report, the stock surged 8.5%, thanks to revenue and earnings that exceeded Wall Street's expectations. Since then, Zscaler has continued to climb, up 17%. 

So what happened? In fiscal Q3, Zscaler’s revenue increased 32% year-over-year to $553.2 million, surpassing the $535.9 million consensus estimate. The company’s earnings were even more impressive, rising 83% year-over-year to $0.88 per share, well above the $0.65 analyst estimate. These strong results prompted Zscaler to raise its full-year revenue guidance to $2.14 billion from the previous $2.12 billion.

Initially, Zscaler expected 27% revenue growth for fiscal 2024, but now it anticipates a 32% increase. The company also projects a 4.9 percentage point rise in its operating profit margin this year. Consequently, Zscaler’s earnings per share for fiscal 2024 are now forecasted to be $3, up from the earlier range of $2.20 to $2.25.

A significant factor behind these strong numbers is the growing adoption of Zscaler’s cloud security platform. The company’s dollar-based net retention rate of 116% indicates that existing customers are spending more, either by expanding their usage or adopting additional products. The number of Zscaler customers with more than $1 million in annual recurring revenue (ARR) grew 31% year-over-year, while those with ARR over $100,000 increased 20%.

Zscaler is also integrating artificial intelligence into its offerings. On the latest earnings call, management discussed developing several AI-powered applications. Some of these solutions, like a copilot for security analysts and a generative AI security offering to monitor AI apps, are already in use. These innovations could significantly expand Zscaler’s addressable market, which is currently estimated at $72 billion.

With 79% of the 43 analysts covering Zscaler rating it as a buy, and a median 12-month price target of $223 suggesting an 18% upside, now might be a good time to consider this stock. Zscaler trades at 13.7 times sales, well below its five-year average price-to-sales ratio of 23. While its forward price-to-earnings ratio of 56 might seem high, it’s actually reasonable compared to the five-year average earnings multiple of 156. Given the company’s projected 67% earnings growth for fiscal 2024, Zscaler appears well-positioned to justify its valuation. 

As we continue to dive into the details of Zscalers massive earnings results, you can’t help but see the momentum that’s continuing to build within the stock price. But remember, prior to the beat, the hopes were low for this company. 

This leaves us with a thought: As earnings season continues to ramp up over the course of the next few weeks, what other stocks might be poised for a similar recovery?

The market is no doubt full of opportunities, and sometimes, like Buffett, value is nestled deep in places most investors completely overlook. 

Stocks.News has positions in Apple as mentioned in the article.