Key Points
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Buffett’s recent comments suggest a preference for Alphabet over rival hyperscalers.
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Credit default swap data indicates Alphabet carries less debt risk than Oracle.
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Berkshire Hathaway has established a substantial, intentional stake in the search giant.
Warren Buffett is known for his diplomacy, and in a recent CNBC interview, the investor noted he avoids publicly criticizing competitors when discussing hyperscalers he prefers not to hold. Despite this restraint, his favor for Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) remains unmistakable. Here is what he revealed.
Buffett initiated Berkshire Hathaway’s position in Alphabet
During the interview, the investor confirmed he personally initiated Berkshire Hathaway’s stake in Alphabet, fully backing Greg Abel as the position grew to 106 million shares, worth approximately $35.5 billion at the time of reporting.
Buffett explained that when questioned about Alphabet versus other hyperscalers, he noted that competitors often feel they have no choice but to participate in the AI market because that is where their customers are migrating. He illustrated this by pointing to how IBM was compelled to restructure its business to align with client demand.
Image source: The Motley Fool.
What it means to Alphabet and AI investors
One reading of these remarks is that while Buffett approves of Alphabet, he perceives some rival hyperscalers as being forced into the AI arms race merely to retain their customer base. While it would be unfair to attribute specific names to his comments, it is difficult not to suspect that Oracle (NYSE: ORCL) falls into the category he is describing.
Alphabet and Oracle credit default swaps
The competitive disparity between Alphabet and Oracle in the AI race is partially mirrored by the pricing on credit default swaps (CDS) for each company’s five-year debt. CDS represents the cost of insurance against debt default, meaning elevated prices signal increased market skepticism regarding solvency.
Market conventions typically anticipate a 40% recovery rate upon default. Consequently, Oracle’s CDS rate of roughly 248 basis points (where 100 basis points equals 1%) suggests an annual default risk of 2.48/60 = 4.13%, and a cumulative five-year risk of 19%. In contrast, Alphabet’s 72 basis points implies a 1.2% annual risk, resulting in a cumulative five-year risk of 5.9%.
Data source: S&P Global Market Intelligence. Chart by the author.
Why Berkshire’s pick, Alphabet, is the better AI choice
Fundamental divergence is also visible in the free cash flow (FCF) and capital expenditure trajectories of both firms. Oracle is consuming cash to fund massive AI spending tied to a significant OpenAI contract. Alphabet, conversely, is positioned more robustly; although Wall Street projects a cash outflow in 2027, the company is expected to return to positive cash generation by 2029.
Data by YCharts.
While investors should avoid panicking over Oracle—since CDS data reflects risk pricing rather than guaranteed default—Alphabet is clearly better equipped to withstand a slowdown in AI application spending. This resilience aligns well with Berkshire’s investment philosophy.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, and Oracle. The Motley Fool has a disclosure policy.
