Warren Buffett and Greg Abel's Alphabet Stake Now Tops $24.2 Billion: 3 Reasons Berkshire Will Keep Buying
Key Points
Alphabet's dominance in search is as strong as you'll see in any company in any industry.
Investing in Alphabet helps give Berkshire direct access to one of the world's key AI companies.
Based on projected earnings, Alphabet is trading at the cheapest of the "Magnificent Seven" stocks.
- 10 stocks we like better than Alphabet ›
At the end of last year, Warren Buffett stepped down as CEO of Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) after leading the charge for 60 years. Current CEO Greg Abel had been at Berkshire for many years before taking over as CEO, but investors have likely wondered how his investment style would differ from Buffett's.
Their strategies differ, but one thing that remains consistent is Berkshire's recent interest in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Berkshire began investing in Alphabet last year when Buffett was still CEO and has continued to increase its stake ever since.
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Alphabet is now Berkshire's fifth-largest holding, with its stake of over $224 billion (as of Aug. 10), accounting for 8.6% of its stock portfolio. With the way Alphabet's business is headed, Berkshire's buying is likely to continue.
1. Alphabet checks off a few of Berkshire's longtime criteria
Buffett has always been known to be more of a value investor than a growth or tech investor. He values companies with heavy cash flow, predictability, and a competitive moat. Alphabet checks off all three boxes.
In its most recent quarter, free cash flow was negative because of its $44.9 billion in artificial intelligence (AI)-related capital expenditures, but it generated $119.8 billion in revenue (up 24% year over year), and its operating income (profit from its core operations) increased 30% to $40.8 billion. They've both grown impressively over the past five years.
GOOGL Revenue (Quarterly) data by YCharts.
When it comes to predictability and a competitive moat, Google Search is the poster child. It has over a 91% market share, making it as dominant as you'll find in any company in any industry. In the past quarter alone, Google advertising generated $81.6 billion. It's the gift that keeps on giving.
None of these three boxes will change in the foreseeable future. Alphabet will likely always be a cash cow with a stronghold in the search industry. But it's also thriving in areas such as Google Cloud, which shows its growth will continue.
Buffett has said that he regrets not investing in Alphabet (then Google) earlier, but it's clear Abel isn't repeating that mistake. Berkshire recently invested $10 billion into Alphabet, one of its biggest deals in years. Abel has begun to put his stamp on Berkshire, and it's clear Alphabet is going to be a big part of the plan.
Image source: The Motley Fool.
2. Berkshire now has exposure to a full-stack AI company
One of the more surprising moves Berkshire has made since Abel took over is selling all of its Amazon shares. But doing so leaves Alphabet as Berkshire's most important AI player, giving it exposure to a full-stack AI company.
Alphabet has its hands in all main phases of the AI value chain. It has its own AI research company; it owns data centers and makes its own AI chips; Google Cloud is the third-largest cloud platform in the world; and Gemini is the second-most-used AI model in the world, trailing only OpenAI's ChatGPT.
Being a full-stack AI company means Alphabet can control its own destiny in many ways. It still has to rely on companies for things like manufacturing, but much of everything it needs is in-house.
3. Alphabet is still trading at a good value
Despite its stock being up over 75% in the past 12 months, Alphabet is still trading at a relatively cheap level. At the time of writing, it's trading at 17.2 times its projected earnings for the next 12 months, the lowest of all "Magnificent Seven" stocks.
GOOGL PE Ratio (Forward) data by YCharts.
That alone doesn't make Alphabet's stock an automatic buy, but when you combine it with its competitive moat and growth potential, it seems like an easy call. It's also much cheaper now than when Berkshire first began buying its shares.
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Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
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