Better Buffett Stock: Alphabet vs. Apple
Key Points
Apple's stock is expensive, but it isn't spending all of its cash the way some other tech giants are.
Alphabet is doing everything it can to accelerate the arrival of AI, and the market is a tad skeptical.
- 10 stocks we like better than Alphabet ›
Former Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) CEO Warren Buffett made several incredible investments. However, he was also noteworthy for letting some obvious ones get away.
One of those was Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), which he regretted not buying sooner. However, he remedied that mistake by purchasing shares not long before leaving his role. Current CEO Greg Abel has kept purchasing Alphabet shares, showing that he's also bullish on the stock.
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Another stock that Buffett identified as a major value opportunity right away was Apple (NASDAQ: AAPL) in the mid-2010s. This turned out to be one of Buffett's best investments ever, and while Berkshire has sold off the number of Apple shares it owns compared to its peak holdings, it's still the largest position in its portfolio.
The question is, between the two, which one is the better buy now? I think it's Alphabet, but the answer to that question may depend on whether you're bullish on AI or not.
Image source: The Motley Fool.
Alphabet is going all-in on AI
Alphabet and Apple are taking two distinct approaches to the emerging AI landscape. Alphabet is going all-in on AI, and plans to spend about $200 billion on data center capital expenditures this year. The uses for these data centers range from being rented out via its cloud computing unit (a very profitable endeavor) to being used for compute capacity for its Gemini platform (not profitable right now). Regardless, Alphabet has positioned itself as an AI-first investment, but there are those who may be a bit wary regarding Alphabet's all-in position on an emerging technology.
Apple is taking the complete opposite approach. Instead of rapidly increasing its AI computing power, it's choosing to deploy Google's Gemini model on its devices, cutting development costs substantially. While it will have to pay to utilize Gemini, the cost to develop a new model may have been far higher in infrastructure and research and development (R&D) expenses. Furthermore, the AI features that Apple has rolled out are lackluster to some, although the revamped Siri AI is receiving positive reviews. Apple still has a long way to go before AI is a top product, and it could lose market share in the smartphone market to some Android phones that are pioneering this technology.
We'll see what happens, but whether you're bullish on AI or not may decide which stock you prefer. Regardless, here are other concrete factors we can look at to determine which stock makes more sense from a valuation standpoint.
Apple's stock has gotten expensive
It's no secret that Apple has long been one of the most expensive big tech stocks out there. It just entered its new fiscal year and trades at an impressive 36 times fiscal 2027 earnings (ending about Sept. 30).
AAPL PE Ratio (Forward) data by YCharts
This is by far its most expensive valuation over the past few years, and could be an issue for future returns. If we assess Alphabet's stock from fiscal 2027's earnings projections, it is far cheaper.
GOOG PE Ratio (Forward 1y) data by YCharts
Alphabet trades for a mere 22 times next year's earnings, making it far cheaper. While Alphabet is one quarter behind Apple's results, which skews this figure in Alphabet's favor a little bit, it's still noteworthy enough that Alphabet is about two-thirds the price of Apple when that offset is accounted for.
Apple may be the more cash-conservative business, which Buffett would have loved; Alphabet is the cheaper stock. At the end of the day, I think Alphabet's lower stock price, combined with the major upside AI presents, makes it the better buy. Apple stock is expensive, and I might miss out on one of the most impressive technological shifts experienced in several decades. It just isn't as attractive to me, and I think there's a reason why Berkshire has been buying Alphabet stock recently and not Apple.
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Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
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