After Buffett stepped down, Berkshire Hathaway, under the leadership of new CEO Abel, has continued its strategy of increasing positions in Alphabet, which has now become the fifth-largest holding in Berkshire’s portfolio. Although the two executives have different strategies, Berkshire’s sustained interest in Alphabet (GOOG) remains consistent. The company began building its position in Alphabet during Buffett’s tenure as CEO last year and has since continuously increased its holdings. As of now, Alphabet has risen to become Berkshire’s fifth-largest heavy holding, with a market value exceeding $224 billion (as of August 10), accounting for 8.6% of its equity investment portfolio. Given Alphabet’s business development trajectory, Berkshire’s buying activities are likely to continue.
Buffett has long been regarded as a value investor, rather than a growth or technology stock investor. He values whether a company has ample cash flow, business predictability, and a wide competitive moat, and Alphabet happens to meet all three conditions.
In the most recent quarter, due to $44.9 billion in artificial intelligence-related capital expenditures, Alphabet’s free cash flow was negative, but its revenue reached $119.8 billion, up 24% year-over-year, and operating profit from its core business grew 30% to $40.8 billion. Over the past five years, both metrics have maintained considerable growth.
In terms of predictability and competitive moat, Google Search serves as a model example. Its market share exceeds 91%, and this dominance is nearly unmatched within the industry. In the last quarter alone, Google’s advertising business generated $81.6 billion in revenue, becoming a steady source of profit.
These three advantages are unlikely to change in the foreseeable future. Alphabet will always be a cash cow in the search space, while also performing strongly in emerging businesses such as Google Cloud, with growth momentum expected to continue.
Buffett once expressed regret that he did not invest in Alphabet (then still called Google) earlier, but Abel clearly will not repeat that mistake. Berkshire recently invested $10 billion in Alphabet, marking one of its largest transactions in recent years. Abel has begun to leave his own mark on Berkshire, and Alphabet will clearly become an important component of his strategic blueprint.
Despite the stock price having risen more than 75% over the past 12 months, Alphabet’s current valuation remains relatively low. As of the time of writing, its forward price-to-earnings ratio for the next 12 months is 17.2 times, the lowest among the “Magnificent Seven” tech giants.
This alone is not sufficient to constitute a buying rationale, but combined with its competitive moat and growth potential, the choice does not seem difficult to make. Compared with the price when Berkshire first built its position, the current price level is undoubtedly more cost-effective.
