Buffett and Ackman's Top Picks: Why They Love Hyperscalers

Warren Buffett and Bill Ackman are known for their shrewd investment strategies, and they share one common theme in their portfolios: a focus on companies with high returns on capital. These two investors have invested heavily in Alphabet (GOOG -1.06%) (GOOGL -1.14%), Amazon (AMZN +0.21%), Microsoft (MSFT -0.59%), and Meta Platforms (META +1.72%).

Buffett initiated Berkshire's position in Alphabet, citing the company's ability to earn high returns on capital for an extended period. He noted that many of Berkshire's top holdings exhibit this trait, including Alphabet.

Ackman shared a similar sentiment, stating that companies with increased capex spending on projects expected to deliver returns comfortably above their cost of capital will see growth and intrinsic value increase as a result.

The two key numbers that factor into both Buffett's and Ackman's decisions are return on invested capital (ROIC) and weighted average cost of capital (WACC). According to an analysis by Michael Mauboussin, hyperscalers, including Oracle, are expected to produce a ROIC above 24% through the end of the decade, with Alphabet expected to produce the highest ROIC of the group - above 30% through 2031.

The long-term cloud contracts signed by top customers reduce the risk for these companies, allowing them to spend heavily on building new infrastructure. The results are predictable: free cash flows will dip into negative territory initially, but will rocket higher as those businesses start producing returns on that capital.