Will Warren Buffett and Greg Abel Make Alphabet Berkshire Hathaway's Next Apple?

One of the biggest stories surrounding Berkshire Hathaway (NYSE: BRKB)(NYSE: BRKA) this year is the company's large purchases of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock for its massive, nearly $359 billion equities portfolio.

Alphabet has quickly become a top position for the conglomerate. It's an interesting move for Berkshire, as it's the first time it's gone all-in on an artificial intelligence (AI) stock. Will CEO Greg Abel and executive chairman Warren Buffett make Alphabet Berkshire's next Apple?

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Berkshire's artificial intelligence horse

Berkshire initiated its Alphabet position last year. Recently, Buffett actually revealed that he was the one who initiated it. Under Abel's leadership, Berkshire has significantly increased its position.

In the first quarter, Berkshire's holdings of Alphabet class A and C shares increased by over $11 billion. Then Berkshire acquired an additional $10 billion from Alphabet in a private placement at an average price of about $350 per share across class A and C shares.This makes Alphabet the fifth-largest position in Berkshire's portfolio.

While Alphabet has a wide variety of large tech businesses that had been doing quite well before AI, the company is a hyperscaler driving the AI revolution by investing heavily in AI infrastructure, so this is Berkshire making a real bet on AI.

Sure, Apple is set to benefit from AI in several ways, but Apple is not one of the large cloud providers and is not spending massively on AI.

On its recent earnings call, Alphabet management raised its capital expenditure guidance to $200 billion or potentially more, almost all of which will be for AI infrastructure.

In a CNBC interview regarding the Alphabet position, Buffett said, "The trick in life is to find -- I mean investing -- is to find businesses that are going to earn high returns on capital for an extended period of time."

While Alphabet has done this historically, the $200 billion-plus in capital expenditures (capex) this year and likely more in 2027 will put Buffett's theory to the test. Free cash flow has already turned negative, and that trend is likely to accelerate.

Buffett also expressed concerns about all the AI spending, so the question becomes whether this is a company that Berkshire can really live and die with, given that the AI trade is likely to face significant obstacles at one point.

Could Alphabet be Berkshire's new Apple?

At roughly 8.1% of the portfolio, Berkshire's Alphabet position still pales in comparison to Apple, which currently accounts for 21.6% of Berkshire's portfolio. At one point, Apple consumed roughly 40% of the portfolio.

While Buffett certainly loves Apple's business due to its strong moat, he also likes how shareholder-friendly the company has been. Since its share repurchase program began in 2012, Apple has repurchased over $850 billion worth of stock.

Now, Alphabet has also repurchased a massive amount of stock over the past decade -- $346 billion since 2016.

However, large amounts of spending on AI infrastructure led Alphabet to halt buybacks earlier this year. And it seems likely that repurchases will be on pause for the foreseeable future, with free cash flow expected to remain negative.

While I don't know the exact thinking of Abel and Buffett, they may have felt they had to invest in some level of AI for the same reason Alphabet feels like it has to invest in all this AI infrastructure: Missing the revolution could be just as costly as getting burned by it. And Alphabet is a safer pick in AI than some other stocks trading at massive valuations that lack the ancillary businesses, scale, and earnings power that Alphabet has.

While I wouldn't expect Berkshire to make Alphabet as big as Apple, especially while they are investing in all this capex, if there is more evidence that the capex will yield adequate returns, Berkshire might then likely consider increasing the position.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.