Just after betting on AI, it hit a market shock! Berkshire reports earnings tonight, and Abel's transformation faces a major test.

Berkshire Hathaway will release its third-quarter earnings tonight, the most closely watched results disclosure since CEO Greg Abel took the helm of the trillion-dollar conglomerate. After his bold bet on artificial intelligence, the related investments immediately ran into market headwinds, and scrutiny of the new leader's strategic judgment and capital allocation capabilities is reaching unprecedented heights. The most notable move since Abel took office was investing more than US$10 billion in Google parent Alphabet and US$930 million in Italian technology group Bending Spoons, completing Berkshire's largest-ever AI-themed bet. However, Alphabet's shares have fallen more than 24% cumulatively since June and have now dropped below Berkshire's entry cost; Bending Spoons' shares briefly spiked after Berkshire added to its position, then continued to decline over the past three weeks. The timing of this series of AI investments is being questioned by the market. In addition, market attention on this earnings report is also focused on three other dimensions: the magnitude of the decline in earnings per share, whether the pace of buybacks can continue, and the pace of cash reserve depletion. According to FactSet data, third-quarter operating earnings per Class A share are expected to fall about 6% year on year to US$8,821; according to Visible Alpha estimates, cash reserves at quarter-end are expected to fall to US$358 billion from US$365.5 billion at the end of the second quarter; on buybacks, the market expects about US$1.64 billion, far below the US$4.5 billion in the second quarter. AI bet faces a reality check Less than a year after taking over Berkshire, Abel declared a break with predecessor Warren Buffett's tradition of avoiding tech stocks with two major investments. According to Bloomberg, he invested more than US$10 billion in Alphabet to support its AI-related businesses and US$930 million in Bending Spoonsan Italian group that uses AI technology to drive corporate transformation. Yet the market's reaction has been sobering. Alphabet's Class A and Class C shares have both fallen more than 24% since June, and the current share price is below Berkshire's purchase price, meaning Berkshire is likely already sitting on an unrealized loss on this investment. As for Bending Spoons, Berkshire bought US$600 million in its July IPO and then added another US$330 million through a private placement, but the share price has fallen for three consecutive weeks after a brief rise. CFRA Research analyst Cathy Seifert said, "I do think this is to some extent a deliberate decision to increase AI exposure, but people have to ask: is it already a bit late?" However, some analysts take a longer-term view. Keefe Bruyette & Woods analyst Meyer Shields believes Abel likely views these investments as strategic bets on the long-term potential of AI technology. "He is not signaling to the market that he can examine these investments with Berkshire's customary conservatism." Shields also noted that when Buffett invested in Apple in 2016, it was likewise heavily questioned, yet it ultimately became one of Berkshire's richest returns. Investors will have to wait until mid-November to learn whether Abel used the market's AI concerns and the pullback in valuations to further add to the related holdings. EPS under pressure; insurance and rail are key variables Third-quarter operating earnings per Class A share (excluding investment gains and losses) are expected to fall about 6% year on year to US$8,821, mainly dragged down by narrower underwriting profit as competition in the property and casualty insurance market intensifies. However, UBS analyst Brian Meredith holds a relatively optimistic stance and expects operating profit to grow about 3%, supported by industrial businesses. Within the insurance segment, Geico's performance is drawing close attention. In the previous quarter, Geico bucked the industry trend of broad profitability and recorded a profit decline, due to higher claims costs and increased advertising spending. Shields said, "The overall personal auto insurance market is becoming more rational in competition, and I think we will see Geico adopt a more aggressive growth strategy." According to Visible Alpha estimates, third-quarter premium revenue is expected to rise slightly by 0.6% year on year to US$22.6 billion, of which Geico premium revenue is expected to be US$11.4 billion, up 1.5% year on year; the consensus forecast for insurance underwriting income is US$1.47 billion, down sharply by 54% year on year. In rail operations, analysts believe strong freight volume data and fuel surcharges are expected to support BNSF's performance. Abel has made improving BNSF's profit margin a priority strategic goal for the company, and the business's current margin remains below most peer competitors. In addition, according to Barron's, Berkshire's yen borrowings may generate hundreds of millions of dollars in foreign exchange losses amid a stronger yen, and these will be included in operating profit under GAAP, weighing somewhat on reported figures. Buyback pace may cool; cash deployment remains the core issue Buyback trends have long been one of the core focal points of Berkshire's earnings season because they directly reflect management's judgment of the stock's intrinsic value. In the second quarter, Berkshire repurchased US$4.5 billion of stock, the highest single-quarter record in nearly four years; according to Barron's calculations, buybacks in the first four weeks of July alone amounted to about US$3.4 billion, when the average Class A share price was below US$750,000, about 1.4 times book value. However, as the share price has continued to climb, room for buybacks has narrowed markedly. Class A shares have now risen to a record high of US$875,000, up 16% over the past month or so, with a price-to-book ratio of about 1.6 times, close to the upper end of valuation levels in recent years. According to Visible Alpha estimates, third-quarter buybacks will be about US$1.64 billion. Seifert said, "If the recent rise in the share price has already dampened their enthusiasm for buybacks, I think investors may feel somewhat disappointed." Seeking Alpha analyst Louis Gerard set a clearer standard for observation: if buybacks are below US$2 billion and cash reserves rise in tandem, or if Class B shares break above US$570 without a corresponding increase in book value, he will downgrade the rating from buy to hold. On cash reserves, Berkshire held about US$365.5 billion in cash, cash equivalents and short-term Treasury bills at the end of the second quarter. Major outflows in the third quarter included the completion of the acquisition of homebuilder Taylor Morrison for about US$6.8 billion in July and the establishment of a Lennar equity position of about US$2.16 billion at the end of September. According to Visible Alpha estimates, cash reserves at quarter-end are expected to fall to US$358 billion. How to further deploy this massive cash pile remains the most urgent expectation many investors have for Abel. This article is reprinted from the "Wallstreetcn" APP, author: Zhao Ying; GMTEight editor: Song Zhiying.