Warren Buffett added Alphabet stock to Berkshire’s portfolio during the third quarter.
Over the past three years, institutional and retail investors have poured record sums into artificial intelligence (AI) stocks. In particular, a small collective known as the “Magnificent Seven” — comprised of Nvidia, Apple, Microsoft, Alphabet (GOOGL +3.53%) (GOOG +3.33%), Amazon, Meta Platforms, and Tesla — are among the most closely held stocks across the entire S&P 500.
One notable investor who stayed on the sidelines throughout the AI revolution, however, is Warren Buffett. Over the last few years, Buffett’s investment conglomerate, Berkshire Hathaway, was stockpiling record levels of cash while everyone else raced to buy more technology stocks.
BRK.B Cash and Short Term Investments (Quarterly) data by YCharts
These dynamics are beginning to shift. According to Berkshire’s latest 13F filing, the investment firm bought 17.8 million shares of Alphabet during the third quarter — a stake that is now worth about $4.3 billion. Notably, Alphabet was the only stock Berkshire purchased in the third quarter.
Let’s break down Buffett’s investment philosophy and explore how Alphabet fits into that equation. From there, I’ll take a look at Alphabet’s valuation metrics to help determine if now is a good time to follow Buffett’s lead.
Today’s Change
(3.53%) $10.21
Current Price
$299.66
Key Data Points
Market Cap
$3616B
Day’s Range
$293.85 – $303.92
52wk Range
$140.53 – $306.42
Volume
74M
Avg Vol
36M
Gross Margin
59.18%
Dividend Yield
0.27%
What types of stocks does Warren Buffett like to buy?
If you want to learn how to invest like Warren Buffett, you’re in luck. While the Oracle of Omaha ranks among the world’s wealthiest people, Buffett’s approach to investing is quite simple.
Berkshire’s portfolio does not feature speculative companies involved in volatile industries. Instead, Buffett seeks out durability. Against this backdrop, it’s not surprising that companies like Apple, Coca-Cola, American Express, and Chevron are some of Buffett’s largest positions.
Each of these is considered a blue chip company that produces steady, predictable cash flow. Moreover, these businesses often reinvest their profits into shareholder rewards programs such as dividends or stock buybacks.
In essence, Buffett pounces on businesses with best-in-class brand recognition that sell products that people need in their daily lives. Given these dynamics, many of the positions in Berkshire’s portfolio could be seen as stocks that long-term investors can own forever.
Image source: The Motley Fool.
Alphabet meets Buffett’s checklist
Alphabet checks off many of Buffett’s boxes. The company owns two of the most recognizable brands on the planet: internet search platform Google and video-sharing website YouTube.
Given the level of internet surface area that Alphabet covers, it’s obvious why advertisers are eager to capitalize on the engagement the company generates. This gives Alphabet enormous leverage in the form of pricing power, which directly translates into a steady, highly profitable operation.
Beyond advertising, Alphabet has also built a thriving cloud computing platform, Google Cloud, which competes with Amazon Web Services (AWS) and Microsoft Azure. Underneath this umbrella sits a custom hardware offering, called tensor processing units (TPUs). Layering cloud software with custom silicon gives Alphabet a direct line into the semiconductor industry — enabling it to take on incumbents like Nvidia and Advanced Micro Devices.
Lastly, Alphabet also has a large consumer electronics business in Android — which competes with Apple — and is also taking on Tesla in the world of autonomous driving through its subsidiary, Waymo.
Alphabet’s diverse ecosystem provides the company with an enviable degree of flexibility — a form of malleability that positions it to pivot and grow during virtually any economic cycle or emerging technology trend. In turn, the company is consistently profitable, which Alphabet uses to reinvest in innovation as well as reward shareholders through a modest dividend program.
Image source: Getty Images.
A Buffett masterclass: Finding value in a sea of growth
In my view, it’s unlikely that Buffett decided to initiate a position in Alphabet purely based on the AI narrative. Berkshire’s portfolio has always featured a limited number of technology businesses.
However, among the tech stocks that Buffett has chosen, a common theme arises. In addition to Apple, Berkshire also has positions in Amazon and now Alphabet. Each of these companies has built diversified ecosystems across software, hardware, and consumer services.
GOOGL PE Ratio (Forward) data by YCharts
With a forward price-to-earnings (P/E) multiple of 28, Alphabet stock is no longer trading at a bargain. While paying a premium is uncharacteristic of Buffett, Alphabet is still the second-cheapest stock among the Magnificent Seven — suggesting investors may not be fully pricing in the company’s next growth phase.
In my eyes, Buffett is still sticking to his playbook — identifying relative value in an otherwise frothy market. Furthermore, I think the timing of Berkshire’s purchase of Alphabet stock is telling. In other words, if Buffett and his constituents felt that AI was a fad or a bubble, then Berkshire would not have bought Alphabet stock.
With these ideas in mind, I think Alphabet remains an attractive opportunity given its proven durability and compelling long-term potential — with or without AI playing a role in the thesis.