AI Stock Not Found in Warren Buffett's Portfolio Yet Adheres to His Investment Principles
Alphabet: A Potential Investment for Berkshire Hathaway
Alphabet, the parent company of Google, is attracting the attention of Berkshire Hathaway, with Warren Buffett expressing his interest in the technology giant. Here's why Alphabet could be a great fit for Berkshire Hathaway's portfolio.
Alphabet's massive market capitalization of approximately $2.3 trillion, nearly as large as the combined market cap of Berkshire Hathaway, Palantir, and Tesla, offers significant growth potential. If it grows slightly faster than these companies over the next five years, it could become even more valuable.
One of Alphabet's key strengths is its leadership in advanced technologies such as AI and quantum computing. The company is developing quantum computing technology, a field none of Berkshire’s other major investments currently explore. Moreover, Alphabet's generative AI stack and proprietary infrastructure and chips position it well to capitalize on AI growth, a critical technology trend.
Alphabet's diverse business portfolio, which includes YouTube dominating streaming TV and Waymo, its self-driving car venture, provides multiple revenue streams and business levers beyond internet search. The company's vertically integrated technology stack, where it builds and controls its own AI models and infrastructure, aims to increase margins and ensure long-term business sustainability.
The alignment between Alphabet's AI focus and Berkshire Hathaway's growing AI exposure is noteworthy. About 25% of Berkshire's portfolio is now invested in AI-related stocks, signaling Warren Buffett’s recognition of the importance of AI, which Alphabet strongly leverages.
Alphabet has a track record of returning value to shareholders, having distributed $9.8 billion in dividends and completed $61 billion worth of share buybacks over the last four quarters. The company's stock is trading at a price-to-earnings (P/E) ratio of 19.4, cheaper than the S&P 500 index's 23.7 P/E ratio, offering sufficient compensation for the known risks.
Despite these advantages, Alphabet faces competition from AI chatbots like OpenAI's ChatGPT. However, Alphabet has launched its own AI assistant, Gemini, and embedded it into Google Workspace applications.
Warren Buffett, known for his preference for companies that return money to shareholders through dividends and stock buyback programs, will continue to serve as chairman of Berkshire's board after stepping down as CEO. His plans to step down as CEO of Berkshire Hathaway at the end of 2025 add another layer of intrigue to the potential investment in Alphabet.
Investing $1,000 in Berkshire stock when Buffett took the helm 60 years ago would have grown to $44.7 million by the end of 2024. The same investment in the S&P 500 index would have grown to $342,906 over the same period, underscoring the potential of Berkshire Hathaway's investments.
However, Buffett tends to avoid buying shares of technology stocks and doesn't invest in artificial intelligence (AI) often. This could be a factor that might deter him from fully committing to Alphabet as an investment. Despite this, the potential benefits of Alphabet's massive scale, leadership in advanced technologies, diversified businesses, and infrastructure control make it a compelling potential investment for Berkshire Hathaway.
[1] Source: CNBC [2] Source: The Motley Fool [4] Source: Yahoo Finance
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