Warren Buffett's Berkshire Hathaway (BRK.A 0.20%) (BRK.B 0.32%) had about $267 billion invested across 41 U.S. stocks as of the third quarter. Those totals changed very little from the previous quarter, but Buffett (and his fellow investment managers) made some trades worth exploring:
- Berkshire sold 41.7 million shares of Apple (AAPL 2.23%). it remains the largest holding at 21% of the portfolio, but Buffett has slashed the position by 74% in two years.
- Berkshire bought 17.8 million shares of Alphabet (GOOGL 1.45%) (GOOG 1.45%). It is a relatively small position at 2% of the portfolio, but still noteworthy because Buffett has traditionally avoided technology stocks.
Alphabet stock has returned 12,180% since its 2004 IPO and its $3.7 trillion market value makes it the third-largest company in the world. That Berkshire only recently started a position teaches a valuable lesson: It's alright to buy a stock that you initially overlooked, even if its share price has increased substantially.
Here's what investors should know.
Image source: Getty Images.
1. Apple
Apple reported encouraging financial results in the September quarter, beating estimates on the top and bottom lines. Total revenue increased 8% to $102 billion driven by strong sales growth in the iPhone, Mac, and services segments. Non-GAAP net income increased 13% to $1.85 per diluted share due to modest operating margin expansion and continued share buybacks.
The investment thesis for Apple centers on its dominance in smartphones and its strong presence in other consumer electronics verticals. Design expertise spanning hardware and software has helped the company build a loyal consumer base willing to pay premium prices. iPhones accounted for 43% of smartphone sales in the September quarter, and Apple's installed base exceeds 2.35 billion devices.
That so many people have Apple devices means the company is ideally positioned to monetize consumer adoption of artificial intelligence (AI). Last year, Apple introduced a suite of generative AI capabilities (called Apple Intelligence) for newer devices. They are currently free, but the company plans to introduce paid AI features in the next few years, according to Bloomberg.
Nevertheless, Apple has a valuation problem. Wall Street expects the company's earnings to increase at 10% annually in the next three years. That makes the current valuation of 36 times earnings look very expensive. Those values give a price-to-earnings-to-growth (PEG) ratio of 3.6, and readings above 2 are typically considered overvalued. I think Apple is a great company, but the stock is not worth the current price.
NASDAQ: GOOGL
Key Data Points
2. Alphabet
Alphabet reported solid third-quarter financial results that beat estimates on the top and bottom lines. Revenue increased 16% to $102 billion, an acceleration from 15% growth in the same quarter last year. GAAP earnings rose 35% to $2.87 per diluted share. CFO Anat Ashkenazi noted strong demand for AI infrastructure, specifically highlighting the adoption of custom chips and Gemini models.
The investment thesis for Alphabet centers on dominance in digital advertising, a position the company hopes to reinforce with artificial intelligence. Conversion rates have improved (i.e., more clicks) since Alphabet introduced AI Max for Search Campaigns earlier this year, and query volumes have increased since it added generative AI features to Google Search.
Meanwhile, industry analysts rank Google Cloud as a leader in large language models, AI application development tools, and conversational AI tools. Google has also developed custom AI chips called Tensor Processing Units (TPUs) that have been adopted by Apple and Anthropic, among other noteworthy clients. Meta Platforms may deploy TPUs in its own data centers in 2027, according to The Information.
Finally, Alphabet's autonomous driving subsidiary Waymo could eventually be a major source of revenue. It already offers commercial robotaxi services in six U.S. cities: Phoenix, Los Angeles, San Francisco, Austin, Atlanta, and Miami. Waymo will launch in four new cities across Texas and Florida in the coming weeks. And the company is testing its vehicles in another dozen cities.
Wall Street expects Alphabet's earnings to increase at 16% annually over the next three years. That makes the current valuation of 30 times earnings look reasonable. Those values give a PEG ratio of 1.9, which is far more attractive than Apple's PEG ratio of 3.6. Investors should consider buying a small position in Alphabet stock today.
