According to recent regulatory filings, Berkshire Hathaway (NYSE: BRK.A) sold approximately 390 million shares of Apple stock during the second quarter and more than 90 million shares of Bank of America stock between mid-July and early August. The sales are notable, because Apple and Bank of America are top holdings in Berkshire Hathaway’s portfolio.

What should investors make of Berkshire’s move? Well, perhaps Berkshire was looking to increase its cash position and decided to take some chips off the table on two of its largest holdings, given their strong performance. Apple stock rallied hard in the second quarter, advancing 24% for the quarter. And Bank of America stock was up more than 19% during the first half of 2024. As a result, we shouldn’t necessarily interpret Berkshire’s sales as a vote of “no confidence” in either company.

So, how do Apple and Bank of America look from Morningstar’s perspective?

Bank of America (NYSE: BAC)

With Bank of America, we thought second-quarter numbers looked good, and we were encouraged by the bank’s net interest income outlook for the rest of the year. Overall, we consider Bank of America to be a preeminent banking franchise that’s in sound financial health. And as the second-largest US money center bank by assets, we think Bank of America has carved out a wide economic moat. We think shares are about fairly valued—neither a screaming buy nor a screaming sell. We assign Bank of America stock a $39.50 fair value estimate.

After years of issues following the financial crisis of 2008, Bank of America has emerged as one of the preeminent US banking franchises. The bank has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four US credit card issuer, is a top three US acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading US brokerage and advisor firms.

We believe that scale and scope advantages are increasingly important as the role of technology in banking grows. The bank is seeing increasing mobile adoption, has access to data on millions of customers, and has one of the largest technology budgets in the industry. Given the scalability of these platforms, we believe these factors will only matter more as the industry progresses.

Bank of America has been investing in organic growth initiatives across its franchises. The bank has opened hundreds of new financial centers across the US over the last several years in an attempt to build its client base across its product offerings. The bank's expenses have crept up quite a bit in the last several years, but we expect expense growth to remain muted in 2024 before it creeps back to the longer-term target of around 2% annual growth. The bank's ability to keep the expense growth rate in check will be key to improving the bank's efficiency.

Meanwhile, the bank isn't the only one investing for future share gains, so the space remains as competitive as ever, and we don't see Bank of America quite catching up with rival JPMorgan. Even so, with its scaled and integrated retail and commercial offerings, Bank of America remains in an enviable competitive position. During the recent banking turmoil, deposit outflows were not a serious issue, and the bank remains solidly profitable, with returns on tangible equity consistently exceeding its cost of equity. While the bank took more duration risk than peers in its securities portfolio, regulatory capital levels and profitability remain solid.

Bank of America bulls say

  • Bank of America is poised to succeed on a nationwide scale, and there seems to be no structural reason it can't be one of the strongest bank franchises going forward.
  • As a GSIB, Bank of America should not have to worry about deposit flight, and its valuation has become less demanding recently, potentially increasing future upside.
  • Bank of America is seeing exceptional digital adoption, and there still seems to be something left in the tank for expense savings, potentially helping the bank better absorb inflationary expense pressure.

Bank of America bears say

  • If the economy ever falters and rates are cut, watch out for the downside. Further, Bank of America is hamstrung with a longer duration securities portfolio, which will take years to mature away.
  • The easy expense cuts for Bank of America are probably over, with incremental expense control measures being more challenging.
  • There are few positive catalysts left for the banks. Funding costs are running higher, net interest income has probably peaked, higher regulatory scrutiny is likely, and a potential recession may be around the corner.

Apple (NAS: AAPL)

After earnings, we raised our fair value estimate on Apple stock to $185 from $170, because we raised our medium-term iPhone forecast. We continue to expect strong revenue growth in fiscal 2025 as users upgrade their iPhones to take advantage of Apple’s generative artificial intelligence features, requiring the latest and greatest hardware. We think Apple has also carved out a wide economic moat; its iOS ecosystem entrenches customers with software capabilities and integration across devices, leading to high switching costs. The stock looks a little overpriced—we think shares are worth $185—but we think Apple is certainly a high-quality name to buy if the price pulls back far enough.

We raised our fair value estimate for shares of wide-moat Apple to $185 from $170 after raising our medium-term iPhone revenue forecast. We continue to expect strong revenue growth in fiscal 2025 as users upgrade their iPhones to take advantage of Apple’s generative artificial intelligence features, requiring the latest and greatest hardware. We now forecast double-digit iPhone revenue growth in fiscal 2025 and another strong year of revenue growth in fiscal 2026. IPhone revenue remains the primary driver of Apple’s results. We see it as the linchpin to the firm’s walled garden ecosystem of hardware, software, and services, which underpins our wide moat rating and long-term growth thesis. However, we continue to see shares as overvalued. Apple’s current stock price implies closer to 20% iPhone revenue growth in fiscal 2025, which we see as lofty given headwinds to growth in China and slowing consumer phone upgrade cycles.

Apple’s June-quarter revenue and September-quarter guidance were above our model, driven by better performance for the iPhone than we feared. June-quarter revenue of $85.8 billion rose 5% year over year. IPhone revenue declined 1% year over year, and we believe guidance implies a return to year-over-year iPhone revenue growth in the September quarter. IPhone growth has been hampered in the past several quarters by greater domestic competition in the Chinese market, as well as extending hardware upgrade cycles in other markets. We expect generative-AI functionality to drive a return to growth in fiscal 2025. Services continued double-digit year-over-year growth, and we see this as Apple’s second-largest driver at roughly 25% of total revenue.

We remain impressed with Apple’s profitability and ability to expand margins. June-quarter gross margin rose 180 basis points year over year to 46.3%. We expect a rising mix of services revenue and higher levels of vertical integration to drive incremental margin expansion over the next five years.

Apple bulls say

  • Apple offers an expansive ecosystem of tightly integrated hardware, software, and services, which locks in customers and generates strong profitability.
  • We like Apple’s move to in-house chip development, which we think has accelerated its product development and increased its differentiation.
  • Apple has a stellar balance sheet and sends great amounts of cash flow back to shareholders.

Apple bears say

  • Apple is prone to consumer spending and preferences, which creates cyclicality and opens the firm up to disruption.
  • Apple’s supply chain is highly concentrated in China and Taiwan, which opens up the firm to geopolitical risk. Attempts to diversify into other regions may pressure profitability or efficiency.
  • Regulators have a keen eye on Apple, and recent regulations have chipped away at parts of Apple’s sticky ecosystem.

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