Berkshire Hathaway CEO Greg Abel Is Doubling Down on His Biggest Investment So Far With Another $10 Billion Buy
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Berkshire Hathaway CEO Greg Abel Is Doubling Down on His Biggest Investment So Far With Another $10 Billion Buy
010 mins
When Greg Abel took over as CEO of Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) from Warren Buffett at the start of the year, all eyes were on what he would do with the company’s massive cash pile. Despite some significant investments in the first quarter, Abel saw a further increase in Berkshire’s investable cash, which now sits at $380 billion, up $11 billion from the start of the year.
But if an idea is good enough to buy once, it’s good enough to buy twice. Abel is doubling down on his biggest investment of the first quarter, agreeing to purchase $10 billion worth of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) in a private placement. Based on current market prices, Alphabet will become the third-largest position in Berkshire’s marketable equity portfolio upon completion of the purchase.
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That’s a rapid ascent from no position at all a year ago. But does it make good investment sense? Let’s have a closer look.
Image source: Getty Images.
Abel is striking Buffett-like deals
Abel’s $10 billion commitment to buy more Alphabet stock is an indication that he’s leveraging the strengths of Berkshire Hathaway’s balance sheet and its reputation. That’s something Buffett often used to his advantage. Abel secured a private placement for Berkshire at a price below Alphabet’s current market value, even after accounting for share dilution. While not a huge discount, on the scale of $10 billion, it adds up to hundreds of millions of dollars in savings.
Buffett has used his position and reputation to secure great deals for Berkshire investors in the past. Most notably, he used $10 billion to acquire preferred shares from Occidental Petroleum when it needed cash for an acquisition. Those shares continue to pay Berkshire a hefty dividend. He also bailed out Bank of America with a $5 billion preferred share deal in 2011, which ultimately led to a massive gain for Berkshire after he converted shares years later.
Now Abel is negotiating a private deal with Alphabet, which isn’t on nearly as shaky a footing as either Occidental or Bank of America, but is looking to raise $80 billion in capital to accelerate its AI expansion. Considering Berkshire Hathaway already has a sizable position in Alphabet, the cash infusion could be a win-win. Alphabet receives the capital it needs to expand as it sees fit, thereby improving the value of Berkshire’s existing holdings.
Is the Alphabet investment a divergence from Buffett’s Berkshire?
Buffett long avoided tech stocks in Berkshire Hathaway’s portfolio. There are a couple of reasons why. First and foremost, Buffett felt he didn’t understand many tech stocks well enough to make valuation decisions better than other market participants did. Second, he felt that many tech companies struggle to establish real competitive moats, as new technology can suddenly disrupt what looked like a strong business — a phenomenon known as Christensen’s innovator’s dilemma.
But Alphabet is a relatively easy-to-understand business, especially considering almost everyone uses its main product every day. Google Search is the core of Alphabet, and it generates revenue from advertising. While many feared that AI chatbots would disrupt Google, what we’ve seen over the past few years is just the opposite.
Alphabet integrated AI into Search, leading to greater engagement with its core product and better monetization through a deeper understanding of search intent. Google Search revenue is accelerating, reaching 19% last quarter. That’s strong evidence of a moat.
The other side of the business is Google Cloud, which is heavily focused on building out compute capacity for AI developers. It’s one of just a handful of hyperscalers with the capital to build out the massive capacity needed to fuel ongoing large language model training and inference. That scale is an advantage, and it has the confidence to build at that scale thanks to its long-term contract commitments and insight into its own operational needs for AI development.
On top of that, Alphabet has differentiated Google Cloud with its own custom hardware and AI services — Tensor Processing Units and Gemini, respectively.
Most importantly, Buffett sought to buy stocks below their intrinsic value. Alphabet shares currently trade for close to 25 times forward earnings expectations. Abel got an even better price. While that’s a valuation above the stock market average, Alphabet is an above-average grower. With revenue climbing 22% year over year last quarter and accelerating, the price looks like a great value right now. It’s no wonder Abel is quickly making it one of Berkshire’s top holdings.
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Bank of America is an advertising partner of Motley Fool Money. Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
