Throughout his storied career at Berkshire Hathaway, Warren Buffett has not been a big investor in tech stocks. However, the famed investor helped Berkshire build two tech positions, which the insurance conglomerate still holds today: Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG).
While I like both stocks, I think Alphabet is currently the better option of the two.
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Let's take a closer look at each stock to find out why.
Apple arguably has the best compounding business model on the planet. That's why it's been a longtime Buffett favorite.
The key to Apple's business is its closed-loop ecosystem. Once a consumer buys an Apple device, especially an iPhone, they soon become immersed in Apple's ecosystem. From there, it is tough to switch devices. The reason is that for every photo taken, app downloaded, and subscription bought, it becomes more difficult for users to walk away.
Apple's devices have fairly predictable replacement cycles, which help drive a steady stream of hardware revenue. More importantly, its devices are a gateway to the company's high gross margin services revenue. This includes things like cloud storage, subscriptions, AppleCare, and the cut it gets in revenue from its app store.
Even bigger, though, are things you may not think of since users aren't directly paying to use them. This includes the search revenue-sharing deal it has with Alphabet, as well as its digital wallet, Apple Pay, from which the company takes a small percentage of every transaction.
With search, Alphabet pays Apple a 36% cut of the ad revenue that comes through Apple's Safari browser on its devices. This is a more than $20 billion annual revenue stream that essentially all falls to profits. That's a lot of money for just letting Google be the default search engine on its devices.
While Apple has a great business, the one knock on the stock right now is its valuation. With Apple recently hitting an all-time high, it brought its forward price-to-earnings (P/E) ratio up to nearly 35 times fiscal 2027 (ending September 2027) analyst estimates. That's not unreasonable for a great business, but it's far from cheap.
One of the last big positions Buffett established before he stepped down as CEO of Berkshire was at Alphabet. Buffett has said it was a stock he had missed out on in the past, but apparently, he feels the stock still has a lot of future upside.
Source: Yahoo Finance Top News — This article was automatically imported from the source. Read full article at original source →
