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Who's Right About Apple Stock: Carl Icahn or Warren Buffett?

Image source: Apple.

Apple (NASDAQ: AAPL) is one of the most widely followed companies in the market, and things are getting increasingly intense for investors in the tech juggernaut lately. Apple stock is down by 20% in the last year, mostly because of fears about slowing revenue growth. While the bulls are pounding the table on the basis that Apple is spectacularly undervalued at current price levels, the bears highlight the fact that sales are moving in the wrong direction.

Adding to the drama, two of the most successful investors in financial history have diametrically opposed opinions on Apple stock. Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) recently bought nearly $1.1 billion in Apple. On the other hand, activist investor Carl Icahn has completely liquidated his position in the company.

Investors need to take this kind of information with a grain of salt. Professional money managers can make mistakes just like anyone else. In fact, they often do. It's of utmost importance to understand the rationale behind a buy or sell decision, so you should always do your own homework as opposed to blindly replicating the investment decisions of others, no matter how famous and successful.

Nevertheless, looking at a company such as Apple from the perspective of investing superstars like Buffett and Icahn can be quite an enlightening exercise.

Beauty is in the eye of the beholder

Icahn and Buffett have different investment philosophies, and they make decisions with different considerations in mind. Icahn is an activist investor, while Buffett is famous for investing in rock-solid companies for the long term.

Activist investors typically take a big position in a company, and then they push for changes and initiatives that can increase shareholder value. When it comes to Apple in particular, Icahn published a letter to CEO Tim Cook in May 2015 saying he considered Apple stock undervalued by as much as 60%, and that the company should capitalize on the opportunity to aggressively repurchase stock at conveniently low prices. Apple has repurchased tons of stock since then, although probably not as much as Icahn would have liked.

As for his selling decision, Icahn explained in a recent interview with CNBC that he still believes Apple is a great company and that the stock is attractively priced. However, he decided to sell Apple because of increasing concerns about the company's performance in China.

The economy in China is decelerating, and the smartphone market in the country is clearly slowing down. Apple reported a big 26% revenue decline from the Greater China region last quarter, amounting to $12.5 billion, or 25% of total revenue.

Icahn also said in the interview that he realized material gains on his Apple investment as the stock delivered a gain of 48% to 50% in nearly two and a half years. Icahn is not particularly focused on investing for the long term, and he probably believes he can find more profitable alternatives somewhere else.

When it comes to Berkshire Hathaway's recent purchase of Apple, the only thing we know for certain is that Buffett explained in an email to The Wall Street Journal that one of his investing lieutenants, either Todd Combs or Ted Weschler, made the decision. Buffett has traditionally stayed away from tech companies because he considers the sector too dynamic and unpredictable, but Apple offers many of the characteristics Buffett appreciates in a business.

To begin with, Apple is one of the most valuable brands in the world, which provides a crucial source of competitive advantage in the industry. The company has unquestionable financial strength. Apple has a pristine balance sheet with nearly $233 billion in cash and liquid investments, and the business generates massive amounts of cash on a regular basis. Apple is also priced at incredibly low levels; the stock trades at a price-to-earnings ratio of 11 versus an average price-to-earnings ratio of 19.4 for companies in the S&P 500 index.

Even if Buffett didn't pick Apple himself, he did pick Combs and Weschler to make investment decisions with Berkshire Hathaway's money under clearly defined investing principles. When considering competitive advantage, financial strength, and valuation, it's not too hard to understand why Apple is now part of Berkshire Hathaway's portfolio.

At the end of the day, it's not about who is right or wrong. Icahn and Buffett are playing different games, and the fact that one is selling while the other one is buying Apple stock shouldn't be a big reason for concern.

It all comes down to your own investing philosophy and your vision of the future for Apple. I'm a big fan of Buffett's approach of investing in high-quality businesses for the long term. Apple fits that description quite well, so I'm not planning to sell my Apple stock anytime soon.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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