Berkshire’s AI Bet Backfires as Abel Faces First Big Earnings Test
TREE NEWS reports: Berkshire Hathaway is set to release its third-quarter earnings tonight, marking the most closely watched report since Greg Abel took over as CEO of the trillion-dollar conglomerate. The spotlight is on Abel’s strategic judgment and capital allocation, particularly after his bold AI investments ran into immediate market headwinds.
Since taking the helm less than a year ago, Abel has broken with predecessor Warren Buffett’s long-standing aversion to tech stocks. He invested over $10 billion in Alphabet to support its AI initiatives and $930 million in Italian tech group Bending Spoons. However, Alphabet shares have tumbled more than 24% since June, falling below Berkshire’s entry price, while Bending Spoons has also retreated after a brief post-IPO pop.
AI Bet Under Scrutiny
The timing of these investments is now being questioned. “I do think this is partly a deliberate decision to increase AI exposure, but one has to ask: is it already a bit late?” said CFRA Research analyst Cathy Seifert. Others, like Keefe Bruyette & Woods analyst Meyer Shields, take a longer view, noting that Buffett’s 2016 Apple investment was similarly criticized before becoming one of Berkshire’s most lucrative bets.
Investors will have to wait until mid-November to learn whether Abel used the AI-driven selloff to add to his positions.
Earnings Pressure and Key Variables
Operating earnings per Class A share are expected to decline about 6% year-over-year to $8,821, weighed down by narrowing underwriting profits in property-casualty insurance. However, UBS analyst Brian Meredith expects a 3% increase, supported by industrial businesses.
Geico remains a focal point after reporting a profit decline last quarter despite industry-wide gains. Analysts expect Geico’s premium revenue to rise 1.5% to $11.4 billion, but overall insurance underwriting income is projected to plunge 54% to $1.47 billion. Meanwhile, BNSF railway is expected to benefit from strong freight volumes and fuel surcharges, with Abel prioritizing margin improvement.
Additionally, Berkshire’s yen-denominated debt may result in hundreds of millions in foreign exchange losses due to yen strength, impacting GAAP operating earnings.
Buybacks and Cash Deployment in Focus
Buyback activity, a key gauge of management’s view on intrinsic value, is expected to slow significantly. After repurchasing $4.5 billion in Q2—the highest in nearly four years—Berkshire likely bought back only about $1.64 billion in Q3 as its stock price surged to a record $875,000 per A share, pushing the price-to-book ratio to 1.6x, near multi-year highs.
“If the recent stock price rise has dampened their enthusiasm for buybacks, I think investors might be somewhat disappointed,” Seifert said. Analyst Louis Gerard has set clear criteria: if buybacks fall below $2 billion and cash reserves rise, or if B shares exceed $570 without a corresponding increase in book value, he would downgrade the stock from buy to hold.
Cash reserves are expected to dip to $358 billion from $365.5 billion at the end of Q2, mainly due to the $6.8 billion acquisition of Taylor Morrison and the $2.16 billion stake in Lennar. How Abel deploys this massive cash pile remains a pressing question for investors.
Key Takeaways for Investors
- AI strategy under the microscope: Abel’s early AI bets are underwater, testing confidence in his capital allocation. Watch for any signal of further buying or retreat.
- Earnings quality matters: Insurance underwriting and BNSF margins are critical. A miss could pressure the stock.
- Buyback slowdown: Reduced repurchases may disappoint investors who rely on buybacks for support.
- Cash deployment: With $358 billion in dry powder, any major acquisition or investment could be a catalyst.
