Does Berkshire Hathaway CEO Greg Abel's New Favorite Stock, Alphabet, Achieve the Rule of 40?

Published: Monday, July 13, 2026 at 11:20 am

Berkshire Hathaway's new CEO, Greg Abel, has made a significant investment in Alphabet, the parent company of Google, signaling a strong conviction in the tech giant's future. Berkshire Hathaway has reportedly invested over $20 billion in Alphabet through various transactions, making it the fourth-largest holding in the conglomerate's portfolio. This substantial commitment suggests Abel views Alphabet as a key player for Berkshire's future growth.

A central question surrounding this investment is whether Alphabet meets the "Rule of 40," a financial metric commonly used to assess the health of software companies by balancing growth and profitability. The Rule of 40 is calculated by adding a company's year-over-year revenue growth rate to its profit margin. A score above 40% generally indicates a company is effectively growing while remaining profitable. Investors can also substitute net profit margin with operating margin, free-cash-flow margin, or EBITDA margin.

Alphabet's performance against the Rule of 40 shows a mixed picture. Based on constant-currency revenue growth, the company achieved 15% annual growth in the past year and 19% in the most recent quarter. When examining operating margin and profit margin, Alphabet significantly surpassed the 40% threshold. This strong performance is attributed, in part, to the booming artificial intelligence sector, which has greatly benefited Alphabet's cloud services and its development of large language models.

However, Alphabet's performance falters when free-cash-flow margin is considered. This metric has shown a decline, particularly in the most recent quarter. This dip is understandable given Alphabet's substantial capital expenditures, projected to be between $180 billion and $190 billion this year, as it invests heavily in building out its AI infrastructure. Some analysts even anticipate Alphabet's free cash flow could turn negative in the coming years due to these investments.

It is crucial to remember that the Rule of 40 is just one of many financial indicators. Investors are cautioned against relying solely on a single metric. While Alphabet's current performance suggests its AI investments are yielding positive results in terms of growth and profitability, the declining free-cash-flow margin raises concerns about potential overspending, a sentiment shared by investors regarding other major AI companies. A sustained decline in operating and profit margins alongside the free-cash-flow issues would represent a significant warning sign for these AI infrastructure investments.

BNN's Perspective:
Greg Abel's substantial investment in Alphabet underscores a belief in the company's strategic direction, particularly its advancements in artificial intelligence. While Alphabet demonstrates impressive growth and profitability in key areas, the declining free-cash-flow margin warrants attention. This metric, coupled with significant capital expenditures for AI infrastructure, highlights a potential trade-off between aggressive investment and immediate cash generation. For investors, the situation presents a classic growth versus value dilemma, where the long-term payoff of AI dominance must be weighed against the current financial strain. A moderate approach would involve closely monitoring both profitability metrics and cash flow generation as Alphabet navigates this critical investment phase.

Tags: Greg Abel, Berkshire Hathaway, Alphabet, Google, Rule of 40, revenue growth, profit margin, operating margin, free-cash-flow margin, artificial intelligence, AI, capital expenditures, capex, large language models, LLMs

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