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Last month, I sold most of my stake in Apple (NASDAQ:AAPL). I still have a smaller investment in the company outside my Stocks and Shares ISA, but most of it’s gone.
Warren Buffett
It might look like I’m just copying Warren Buffett, who has been reducing Berkshire Hathaway’s stake in Apple. And to be honest, if I didn’t know better, I’d probably accuse myself of doing that too.
I’m not doing that though. For one thing, the reasons the Berkshire CEO gave at its annual shareholder meeting don’t apply to me.
Buffett explained the decision to sell Apple shares in terms of tax considerations. The taxes Berkshire paid on the profits amounted to 21%, which would have been 35% in the past (and 52% before that).
In Buffett’s view, it’s unlikely that taxes will stay at that level. If that turns out to be correct, the sale gave Berkshire a way to realise profits on its Apple investment it would otherwise have lost in tax.
In the UK, a reform of Capital Gains Tax might well be on the cards with the upcoming budget. But I’m not worried (yet) about investments in my Stocks and Shares ISA from that perspective as gains are tax-free.
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I do have another reason for being concerned about Apple though. And that’s enough to convince me there are better opportunities for the capital in my ISA at the moment.
Antitrust
The concern I have is antitrust. Apple’s currently being sued by the Department of Justice (DoJ) in the US on the grounds that it uses unfair means to maintain its competitive position.
In my view, this is key to the viability of the stock as an investment at today’s prices. Apple needs to grow its earnings over time in order to justify a price-to-earnings (P/E) multiple of around 35.
The most obvious way in which it can do this is by increasing revenue in its Services division. Gross margins in this part of the business are 74%, compared to around 35% in the Products division.
Growing Services revenue however depends on the number of iPhone users either remaining steady or increasing over time. And the closed ecosystem Apple uses to maintain this is important.
From a legal perspective, I’m not sure what the merits of the DoJ’s case are. I’ve heard a few legal minds saying it looks impressive, but I’m not in a position to evaluate it for myself.
Others might be in a different position on this. But if I can’t accurately assess the probability of a potentially significant threat, that’s a big issue when it comes to owning a stock.
Assessing risks
There’s clearly a lot to like about Apple from an investment perspective. Service revenues are at all-time highs and it looks well-positioned to benefit from the rise of artificial intelligence (AI).
Nonetheless, I think there’s a big uncertainty around the future of the firm’s competitive position. And that’s key to the long-term outlook for the stock, in my view.
That’s why I’ve been selling Apple from my Stocks and Shares ISA. In the current environment, I think there are more predictable investments available.
