The investing community was abuzz with the news last week that Warren Buffett and his team at Berkshire Hathaway had bought only one new stock in the third quarter, and it was Alphabet (GOOG +1.99%) (GOOG +1.99%).
That was a significant departure from Buffett's classic stance of generally avoiding tech stocks. He does already own stakes in Apple (AAPL +2.65%) and Amazon, but one could argue that he bought them for other reasons. For example, one can argue that Apple is really a consumer goods company, since it sells devices. Amazon, meanwhile, has a massive retail business, and, in any case, Buffett has explicitly stated that it was one of his investing managers, Todd Combs and Ted Weschler, who made the call to buy it. However, he has repeatedly expressed his admiration for Jeff Bezos.
Alphabet, though, is more of a pure tech investment, and the team at Berkshire Hathaway bought it during a period when it was continuing to trim its stake in Apple. The conglomerate sold almost 41.8 million shares of Apple -- about 14.9% of its position as of the end of Q2. Based on its average price during the period, that would have amounted to sales of around $9.4 billion. Yet thanks to Apple's share price growth across that quarter, the value of Berkshire's stake in the iPhone maker still grew by about $3.2 billion.
Meanwhile, Berkshire loaded up on $4.3 billion worth of Alphabet stock.
However, all of this may be more of a signal of confidence in Apple than investors realize.
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Is Buffett down on Apple?
At the end of 2023, Berkshire Hathaway's stake in Apple represented a full 50% of the value of its equity portfolio. That's not a very diversified portfolio, which might be why the company has started to sell the stake off in increments. It's down to just over 21% of the portfolio today.
Buffett has said he would never close the Apple position, and he praises the tech company and its leader, Tim Cook, all the time. But one of the reasons everyone needs to periodically assess their portfolios -- even "set it and forget it" investors -- is that having too large a portion of your funds invested in one stock or a small handful of them can be risky. Consider that Apple stock has been trailing the market this year, even though it has recently surged a bit closer to parity with it. At several points in recent years, Apple was the most valuable company in the world, until Nvidia convincingly jumped to a solid lead this summer. Although I can't claim to know for certain why Buffett and his team were selling shares, that may have factored into the equation.
Another reason it may have looked like a good time to sell part of the position was the stock's valuation, which has become quite high. Apple trades at a P/E ratio of 37, even though it's growing quite slowly. That premium is likely due to the company's stability and reliability.
But considering that Apple stock is still the largest position in Berkshire's portfolio, I don't think Buffett is losing confidence in it. In fact, the investment in Alphabet may be another way he's voting for Apple.
NASDAQ: AAPL
Key Data Points
Investing in Alphabet is also investing in Apple's future
Just after Berkshire Hathaway submitted its latest 13F filing to the Securities and Exchange Commission (SEC), Bloomberg reported that Apple has agreed to pay Alphabet $1 billion annually to use its large language model (LLM), Gemini, to power its Siri voice assistant.
Breaking this down, Apple is going to pay for the use of the LLM in improving Siri's functionality. The market has been concerned that Apple is lagging the pack in AI, and this deal is meant to help Siri catch up to rival voice assistants while Apple works on its own LLMs. Apple's bespoke version of Gemini will run on private Apple servers, and its high-parameter complexity will help Siri's summarize and planner functions gather information and perform complex tasks.
NASDAQ: GOOG
Key Data Points
Don't give up on Apple
Apple stock has been gaining ground recently based on excellent iPhone sales. The iPhone is Apple's signature product, and it's the most popular smartphone in the U.S. The new iPhone 17 is also doing very well in China. It hasn't made sense to bet against Apple in the past, and it wouldn't make sense to expect that the company will sit back and let rivals get too far ahead of it in AI. The fact that Alphabet will be providing a key new service to Buffett's favorite portfolio holding may have contributed to Berkshire's decision to finally press the buy button on Alphabet stock.
That wouldn't be the only reason Buffett invested in Alphabet, though. He has long said he regrets not having invested in it earlier, as it has many of the features he loves in a company. This new partnership, though, makes his stock buy a vote of confidence in the futures of both Alphabet and Apple.
