Berkshire Hathaway‘s (BRKA +0.66%) (BRKB +0.66%) sizable stake in Alphabet (GOOG +3.87%) (GOOGL +3.77%) is about to grow considerably. On Monday, the technology giant announced it’s raising $80 billion to fund continued investments in artificial intelligence (AI). Of that, $10 billion will come directly from Berkshire through a private placement of discounted shares.
There’s nothing particularly unusual about any of it — private fundraising is often cheaper and easier for both parties. And, AI remains a compelling opportunity.
How and when it all took shape, however, concerns me. Abel and his lieutenants may not be as disciplined in their picks as their predecessor, Warren Buffett, was.
Image source: The Motley Fool.
Two concerns about the Alphabet deal
Don’t misread the message. Even overvalued Alphabet shares are arguably a better bet than most other tickers at any price. The company is, after all, a major gateway to the internet.
This is still a little concerning for a couple of philosophical reasons, though.
The first of these reasons is the price Abel was willing to pay. Although the price of $351.81 for $5 billion worth of A shares and $348.20 apiece for $5 billion worth of C (non-voting) shares is roughly a 7% discount to Monday’s pre-announcement prices, it’s also more than a 20% premium to Q1’s closing prices, when Berkshire essentially tripled its Alphabet stake first established in the third quarter of last year.
Today’s Change
(3.77%) $13.54
Current Price
$372.53
Key Data Points
Market Cap
$4.3T
Day’s Range
$358.21 – $373.23
52wk Range
$162.00 – $408.61
Volume
2M
Avg Vol
28.9M
Gross Margin
60.43%
Dividend Yield
0.23%
Although even Buffett would agree that you should be willing to pay for quality, it doesn’t appear that Abel is interested in even trying to hold out for a better price that most investors understand will materialize sooner or later.
Did Berkshire have to move quickly to take advantage of the discounted offer? Maybe. But given that the private placement agreement between Berkshire Hathaway and Alphabet is part of a broader fundraising effort, this deal seems to be more on Alphabet’s terms and timing than Abel’s.
That’s my second concern. Berkshire is handing over very real cash in exchange for greater exposure to a plan that may or may not pay off as hoped, with no clear time frame for when this next round of AI capital expenditures will add to the top or bottom lines. If Abel wanted some more exposure to the artificial intelligence revolution, there are plenty of other stocks other than Alphabet’s — and at a better price — that would bring just as much upside to the table. Berkshire didn’t buy any of them.
Today’s Change
(0.66%) $3.13
Current Price
$478.50
Key Data Points
Market Cap
$1.0T
Day’s Range
$474.69 – $482.75
52wk Range
$455.19 – $516.85
Volume
192.5K
Avg Vol
4.8M
Gross Margin
23.70%
Berkshire’s deal with Alphabet is worth questioning
It’s not catastrophic, to be clear. It is concerning, though, not because Alphabet is a bad stock to own, but because Greg Abel seems to be thinking reactively rather than proactively, buying stocks or adding to existing positions without a clear strategic purpose or the patience to hold out for a better price.
It’s not like he’s gaining much more control over Alphabet, either. Again, half of the aforementioned private placement is of shares without any voting rights. With a little more patience and/or a few dollars more, Abel could have bought just as many A shares in the open market.
Only time will tell whether this is a one-off. Let’s hope it is.
