Under former CEO Warren Buffett, Berkshire Hathaway (BRKB +0.07%) (BRKA +0.03%) was never a big investor in the tech sector. Buffett always believed that we should invest in what we know, and he didn't believe he understood most tech stocks well enough to buy them.
On top of that, given the pace of innovation, he believed that tech companies not only got disrupted too quickly, but also that disruption was in fact the tech business model itself. With modest moats and business models having to constantly evolve, he found projecting a company's long-term earnings and cash flow to be way too difficult.
Buffett finally started to invest in the sector in 2011 with International Business Machines, given its more predictable business model, although the stock woefully underperformed. He later hit pay dirt with Apple, but he viewed it much more as a consumer goods company than a tech company, which is a fair point.
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Abel puts his stamp on Berkshire's investment portfolio
New CEO Greg Abel is leaving his own mark on Berkshire and its investment portfolio by loading up on shares of Alphabet (GOOGL +1.54%) (GOOG +1.56%). Berkshire bought nearly $17 billion worth of shares over the past three quarters, and it will purchase $10 billion more in a private placement as part of an $80 billion offering by Alphabet to help fund its data center construction. This latest investment is set to make Alphabet Berkshire's fourth-largest equity holding, assuming no other major changes at the top of its portfolio.
And make no mistake, Alphabet is a bet on tech and artificial intelligence (AI), not a consumer goods bet. The company is raising cash through this equity offering to aggressively expand its AI infrastructure. It will make $180 billion to $190 billion in capital expenditures this year, with plans to significantly raise that amount in 2027.
This is no longer a company generating a boatload of free cash flow that Berkshire is investing in, but one that plans to spend unapologetically given the opportunity it sees in front of it. With the big cost edge that Alphabet has with its chips and AI models, its spending makes sense. But it is surprising to see Berkshire buy into it, even though the company is the most complete AI play out there.
Image source: The Motely Fool.
Is Berkshire stock a buy on this investment shift?
Berkshire ended the first quarter with nearly $400 billion in cash, giving Abel a lot of freedom to remake the portfolio how he sees fit. Investing in Alphabet adds an exciting growth stock to its mix and shows a willingness to move beyond stodgy businesses.
However, Abel isn't going all-in on tech, recently agreeing to acquire homebuilder Taylor Morrison Home for $6.8 billion in cash ($8.5 billion when including the assumption of debt), which he can slot into next to Berkshire's other housing-related businesses.
With Berkshire finally looking to put its cash hoard to work and getting into the tech sector, now looks like a good time to start accumulating the stock.
