Warren Buffett’s Successor, Greg Abel, Tripled Berkshire’s Stake in This Megacap AI Stock (Hint: Not Apple)

Key Points

• Berkshire Hathaway CEO Greg Abel has built a large position in Alphabet since taking over for Warren Buffett earlier this year.

• Alphabet reported strong financial results in the second quarter, but the stock declined due to concerns about capital expenditures.

• Alphabet’s investments in artificial intelligence (AI) infrastructure are paying off, and the stock currently trades at an attractive valuation.

• 10 stocks we like better than Alphabet ›

Under Warren Buffett, Berkshire Hathaway built a substantial stake in Apple. It still ranks as the company’s largest equity investment, accounting for 22% of its U.S. stock portfolio. But Buffett’s successor, Greg Abel, added a second megacap stock in the first quarter: Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG).

Berkshire initially had 2% of its U.S. stock portfolio in Alphabet, but Abel tripled the stake in the second quarter. Alphabet now accounts for 6% of Berkshire’s domestic equity investments, a noteworthy change because the company’s $263 billion U.S. stock portfolio accounts for a large percentage of its $1 trillion market value.

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Here’s what investors should know about Alphabet.

Image source: Getty Images.

Alphabet monetizes AI at multiple layers of the value chain

Alphabet stock is compelling not only because the company has reported strong financial results in several consecutive quarters, but also because it has strong growth prospects tied to cloud computing and artificial intelligence, not to mention its dominant position in internet search and advertising.

Alphabet reported encouraging financial results in the second quarter, despite missing Wall Street’s consensus estimate on the bottom line. Revenue climbed 24% to $119.8 billion, the sixth straight acceleration, driven by particularly strong sales growth in the cloud segment. Operating income (which excludes unrealized gains from its investment in SpaceX) increased 31% to $40.8 billion.

“It’s clear that our AI investments and full-stack approach are driving performance across our business,” CEO Sundar Pichai explains. That full-stack approach — meaning Alphabet develops products at every layer of the value chain — creates cost efficiencies and lets the company innovate more quickly than competitors that rely on third-party suppliers.

Beyond that, Alphabet’s full-stack strategy means it can monetize AI in several different ways. Revenue streams include custom chips (tensor processing units or TPUs), cloud infrastructure services, proprietary models (Gemini), and applications like Google Search, YouTube, and Gemini Enterprise. No other company touches every layer of the value chain to the same degree as Alphabet.

Custom silicon, in particular, is important because it represents a relatively nascent growth opportunity. Alphabet’s TPUs are the second-most popular AI accelerators behind Nvidia‘s GPUs. Alphabet is unlikely to dethrone Nvidia, but it is well positioned to gain market share as companies search for more cost-efficient AI infrastructure solutions.

Indeed, Pichai recently told analysts, “As TPU demand grows from AI labs, capital markets firms, and high-performance computing applications, we will begin to deliver TPUs to a select group of customers in their own data centers.” In other words, Alphabet is now selling custom chips directly to customers, in addition to renting TPUs through its cloud computing platform.

Alphabet stock trades at a very reasonable valuation after its post-earnings drawdown

Alphabet stock is down 7% since the company announced second-quarter financial results on July 22, and shares currently trade 21% below the record high they hit in May. The recent drawdown reflects anxiety about the company raising its capital expenditure (capex) outlook for the year.

“We are updating our full-year 2026 capex guidance range to $195 billion to $205 billion, up from our previous estimate of $180 billion to $190 billion,” explained CFO Anat Ashkenazi on the earnings call. Demand for AI infrastructure continues to exceed supply, so Alphabet is trying to address that problem as quickly as possible.

I think the market overreacted. Alphabet’s cloud revenue increased 82% during the second quarter, the fifth straight acceleration. Admittedly, the company has spent a tremendous amount of money to fund that growth, but investments in AI infrastructure are paying off. Neither Amazon nor Microsoft has reported cloud sales growth anywhere close to that figure in recent quarters.

Looking ahead, the Wall Street consensus says Alphabet’s earnings will increase at 14% annually during the next three years. That makes the current valuation of 16 times earnings look quite reasonable. Investors should be comfortable purchasing a stake in this AI stock today, especially after the recent sell-off.

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Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.