Key Points
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After saying they wouldn’t buy Apple, Buffett and Munger made it Berkshire’s largest investment ever.
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Abel is taking the opportunity to invest huge sums of capital into a long-overlooked company.
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The current stock price offers compelling value relative to the potential earnings growth in the business.
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Warren Buffett once joked that departing Apple (NASDAQ: AAPL) Chief Executive Officer Tim Cook made more money for Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) shareholders than he ever did as CEO. Indeed, Buffett’s decision to buy Apple, and a lot of it, turned out to be one of his most lucrative investments of all time. And while Buffett sold a huge chunk of the investment before stepping down as CEO, Apple remains Berkshire Hathaway’s largest holding.
Greg Abel took over for Buffett at Berkshire at the start of the year, and he’s started to exert his own influence on the company’s enormous equity portfolio. Buffett left him with roughly $369 billion in cash and equivalents to deploy, as well as several dozen companies generating substantial free cash flow each quarter. After deploying an estimated $23 billion into a single stock, however, Abel may have already found Berkshire’s next Apple.
How Buffett and Munger started buying Apple
At the 2012 Berkshire Hathaway annual meeting, Buffett and the late Vice Chairman Charlie Munger were asked whether they would consider buying companies like Apple and Google, now Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Buffett praised both companies and said, “I would not be at all surprised to see them be worth a lot more money 10 years from now, but I wouldn’t want to buy either one of them.”
It all came down to their circle of competence. “I think we can fairly say that other people will always understand those two companies better than we do,” Munger added. “We have the reverse of an edge.”
Four years later, Berkshire started buying Apple stock.
The about-face stems from a complete reconsideration of Apple, especially as the stock price fell toward an incredibly cheap valuation. Buffett began to view Apple as a consumer-goods company with tremendous pricing power instead of a tech company reliant on innovation. And after Buffett lieutenants Ted Weschler and Todd Combs presented it as a good investment opportunity, he began buying it in large quantities. Ultimately, Buffett sunk $36 billion of Berkshire’s cash into the stock from 2016 through 2018.
The willingness to continue examining every opportunity in the market ensured Buffett and Munger didn’t miss out on the biggest investment of their lifetimes. Berkshire’s Apple position grew to $177 billion in 2023 before Buffett started trimming the stock from the portfolio. After selling 75% of Berkshire’s stake, the remaining shares are still worth more than $70 billion.
Greg Abel is taking a similar approach, examining every opportunity without abandoning the core investment philosophy behind Berkshire’s portfolio. And that may have led to Berkshire Hathaway’s next Apple: an opportunity to deploy a huge amount of capital with strong return potential.
Abel’s $23 billion bet (so far)
Abel has made several big investments in his short tenure as CEO, but his biggest so far is the position in Alphabet. Berkshire initially took a small stake in Alphabet in the third quarter of last year while Buffett was still CEO. It’s unclear whether Buffett, Weschler, or Combs pushed for that initial position. However, Abel appears to be behind the recent purchases, given their size.
Berkshire added nearly 40 million shares of Alphabet stock in the first quarter for an estimated cost of about $13 billion. At the start of June, Abel negotiated a $10 billion private placement for an additional 28.6 million shares. While Berkshire received a discount from the prevailing share price at the time of the deal, the stock subsequently sank below that level, allowing Abel to buy even more at the same price. It wouldn’t be a surprise if he had.
Abel’s decision to load up on Alphabet may seem like a big shift away from the core investment philosophy that got Berkshire to this place. But at its core, Alphabet may be simpler than it sounds. There are two key businesses within Alphabet: advertising and cloud computing.
The advertising business is anchored by Search and YouTube, both of which have established durable competitive advantages. Many expected AI chatbots to disrupt Google’s search dominance. Instead, it has reinforced Google as the first stop for most internet searches.
In fact, the company has leveraged AI to expand the types of searches users perform on its service. As a result, Alphabet has seen accelerating search ad revenue during the past four quarters. YouTube, likewise, has established itself as the top source for ad-supported video, winning over amateur and professional video producers alike with its monetization capabilities.
In cloud computing, the business is relatively straightforward. Alphabet builds capacity and rents it to customers. It has a few other capabilities to build out a fully fledged platform instead of merely renting infrastructure, but at its core, it’s similar to a real estate business.
Alphabet has seen tremendous demand for its cloud service, as reflected in its remaining performance obligations. As of the end of the first quarter, the company had $460 billion in contracted backlog, up from $230 billion the previous quarter.
There’s a long runway for growth at Alphabet across its business segments, especially with free cash flow from advertising funding accelerated growth in the cloud business. With the stock trading at less than 26 times forward earnings, it still looks like a good value relative to its growth outlook. And with a market cap of more than $4 trillion, Abel can deploy a huge chunk of Berkshire’s cash in the business without disrupting the market. He could make it Berkshire’s largest investment ever over the next few quarters.
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Adam Levy has positions in Alphabet and Apple. The Motley Fool has positions in and recommends Alphabet, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
