Alphabet vs. Apple: Which Warren Buffett Favorite Is the Better Stock to Buy Today?

Throughout his storied career at Berkshire Hathaway, Warren Buffett has not been a big investor in tech stocks. However, the famed investor helped Berkshire build two tech positions, which the insurance conglomerate still holds today: Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG).

While I like both stocks, I think Alphabet is currently the better option of the two.

Let's take a closer look at each stock to find out why.

Warren Buffett at an event. Image source: The Motley Fool.

Apple

Apple arguably has the best compounding business model on the planet. That's why it's been a longtime Buffett favorite.

The key to Apple's business is its closed-loop ecosystem. Once a consumer buys an Apple device, especially an iPhone, they soon become immersed in Apple's ecosystem. From there, it is tough to switch devices. The reason is that for every photo taken, app downloaded, and subscription bought, it becomes more difficult for users to walk away.

Apple's devices have fairly predictable replacement cycles, which help drive a steady stream of hardware revenue. More importantly, its devices are a gateway to the company's high gross margin services revenue. This includes things like cloud storage, subscriptions, AppleCare, and the cut it gets in revenue from its app store.

Even bigger, though, are things you may not think of since users aren't directly paying to use them. This includes the search revenue-sharing deal it has with Alphabet, as well as its digital wallet, Apple Pay, from which the company takes a small percentage of every transaction.

With search, Alphabet pays Apple a 36% cut of the ad revenue that comes through Apple's Safari browser on its devices. This is a more than $20 billion annual revenue stream that essentially all falls to profits. That's a lot of money for just letting Google be the default search engine on its devices.

While Apple has a great business, the one knock on the stock right now is its valuation. With Apple recently hitting an all-time high, it brought its forward price-to-earnings (P/E) ratio up to nearly 35 times fiscal 2027 (ending September 2027) analyst estimates. That's not unreasonable for a great business, but it's far from cheap.

Alphabet

One of the last big positions Buffett established before he stepped down as CEO of Berkshire was at Alphabet. Buffett has said it was a stock he had missed out on in the past, but apparently, he feels the stock still has a lot of future upside.

There are a lot of reasons to like Alphabet. It is the most complete artificial intelligence (AI) player, with both top chips and AI models. And while it has recently had a setback with its latest AI model, having to delay it due to it missing internal goals, this looks more like a temporary setback.

The model falls short in software coding, but that does not impact where Alphabet is strongest, which is consumer AI. In this area, Alphabet has embedded its AI models into Google Search and uses its distribution advantage (its ownership of the Chrome browser, the Android smartphone operating system, and its search revenue-sharing deal with Apple) and global ad network to drive query and revenue growth.

Meanwhile, Alphabet's biggest advantage is its custom AI chips, called Tensor Processing Units (TPUs). Alphabet has developed the most powerful custom AI accelerators, making them a strong and much cheaper alternative to Nvidia's graphics processing units (GPUs).

This allows Alphabet to train its models and run inference more cheaply, as well as to get higher margins on its cloud computing offering. Its chips are so well regarded that large customer Anthropic has placed large TPU orders directly with Alphabet partner Broadcom, giving it another high-margin revenue-generation opportunity.

Trading at a forward P/E of below 25 times 2027 analyst estimates, Alphabet is a much cheaper stock than Apple. Given its significant valuation discount to Apple and the strong growth opportunities still in front of it, Alphabet's stock is currently the better buy in my view.

Geoffrey Seiler has positions in Alphabet and Broadcom. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, Broadcom, and Nvidia. The Motley Fool has a disclosure policy.