Will Alphabet Break Warren Buffett's Cardinal Rule of Investing?

The most notable change in Berkshire Hathaway's (NYSE: BRKA)(NYSE: BRKB) massive, roughly $360 billion stock portfolio this year has been the conglomerate's large increase in Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG).

While Berkshire initiated the position last year under Warren Buffett's leadership, the company has significantly increased its stake in Alphabet under new CEO Greg Abel. Between the end of 2025 and the end of the second quarter of this year, the value of Berkshire's Alphabet position soared from about $5.6 billion to nearly $37.8 billion, making Alphabet one of Berkshire's largest positions.

Perhaps even more interesting is that as Berkshire was buying, Alphabet's returns have declined. Will Alphabet break Warren Buffett's cardinal rule of investing?

Image source: The Motley Fool.

Returns are declining as capex soars

In a surprising interview with CNBC in July, the 96-year-old Buffett, who remains executive chairman of Berkshire, revealed he had initiated the Alphabet position last year, meaning he and Abel likely decided together to significantly increase Berkshire's stake.

During this same interview, Buffett also told CNBC, "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," Buffett said.

By returns on capital, Buffett is most likely referring to return on invested capital (ROIC), which essentially examines how efficiently companies use capital to generate profits. Capital, in this scenario, refers to both debt and equity.

The goal is for companies to generate ROICs that are above their weighted average cost of capital (WACC). Right now, Alphabet is experiencing declining ROICs, and that trend is expected to continue in future years, according to Wall Street analysts.

According to Visible Alpha, Alphabet generated a post-tax ROIC of over 58% in 2024, which is simply remarkable. In 2025, that number declined to roughly 42%. This year, analysts on average expect another decline to 38.3%.

While much more difficult to predict and likely to be revised, analysts also expect Alphabet's ROIC to decline in each year between 2027 and 2029, falling below 31% by 2029, which, generally speaking, is still quite strong.

The reason for the decline is that Alphabet, along with other hyperscalers, is significantly increasing its capital expenditures to build artificial intelligence infrastructure. Alphabet has guided for roughly $200 billion in capex this year, and that number is expected to "increase significantly in 2027," according to Alphabet CFO Anat Ashkenazi on the company's most recent earnings call.

Increased capex leads to lower ROIC, which is net operating profit after tax divided by invested capital. Capex increases the denominator, invested capital.

Buffett clearly knows this, so what is his plan?

Buffett is widely considered the greatest investor of all time, so he clearly understands what is happening.

While he probably doesn't love the near-term trends, he likely also realizes that Alphabet, as a hyperscaler, feels the significant capex investment is necessary to avoid missing out on the AI revolution. Investors should also understand that these companies are led by some of the brightest minds in the world. While they aren't always right, they don't make bets like this unless they have a strong conviction. The goal is for capex to flatten in the coming years and for revenue to accelerate over many years thereafter, leading to higher ROICs.

Now, whether this happens or not is hotly debated on Wall Street, and investors have seen this debate on full display this year in the stock prices of hyperscalers, which have bounced around. While Alphabet's ROIC has fallen significantly, a consistent ROIC above 30% remains quite attractive, though it also depends on how much the company's WACC increases, if at all.

So, while I wouldn't say Alphabet is breaking Buffett's cardinal rule for investing just yet, it raises the possibility. Buffett, Abel, and the Berkshire team likely believe this is only a small bump on the road. Remember, Berkshire likes to buy stocks it can ultimately hold forever.

There are other Alphabet-owned businesses that also make the stock a compelling buy. But it will be interesting to see if and when Alphabet can return its ROIC to levels seen in recent years, and how much slack Buffett and Abel are willing to afford the company.

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