In May, Warren Buffett announced that he plans to step down from his role as CEO of Berkshire Hathaway (BRK.A -1.25%) (BRK.B -1.35%) at the end of 2025. It will cap off a spectacular run of success that dates back to 1965 -- though his journey isn't over completely, because he will continue to serve as chairman of Berkshire's board.
Had you invested $1,000 in Berkshire stock when Buffett took the helm 60 years ago and held on for that entire time, you'd have been sitting on shares worth an eye-popping $44.7 million at the end of 2024. The same investment in the S&P 500 (^GSPC -0.84%) index would have grown to just $342,906 over the same period. Part of that growth came from the dozens of businesses that the conglomerate purchased in their entirety over the years, but the rest was driven by the incredible stock-picking of Buffett and his team.
Buffett uses a simple strategy, and as a general rule, he tends to avoid buying shares of companies whose businesses he doesn't understand. As a result, he doesn't invest in technology stocks very often, and he certainly doesn't chase hot trends like artificial intelligence (AI).
However, there is one AI stock that could be a great fit in Berkshire's portfolio because it meets most of Buffett's investment criteria, and he has even expressed regret for not investing in it during its early years.
Image source: The Motley Fool.
Warren Buffett uses a simple investing strategy
Buffett is a value investor who likes to buy good companies when they are trading cheap, but he doesn't shy away from picking up shares of spectacular companies at a fair price.
When considering a potential investment, Buffett looks for companies with steady growth, reliable profitability, and strong management teams. He also likes companies that return money to shareholders through dividends and stock buyback programs. But time is Buffett's most important weapon because compound growth amplifies his results over the long term -- he has often been quoted as saying his preferred holding period is forever.
Buffett oversees numerous wholly owned Berkshire Hathaway subsidiaries, including Duracell, Dairy Queen, and GEICO Insurance. But he also helps manage its portfolio of publicly traded stocks and securities, which currently includes holdings in 38 companies and is worth around $278 billion today. As I mentioned earlier, he generally avoids technology stocks like those in the "Magnificent Seven," but he has made exceptions.
Between 2016 and 2023, Buffett plowed approximately $38 billion into Apple, which was the most money Berkshire had ever invested in any single company. He views Apple as a consumer products company rather than a tech company, and he often commends the strength of its brand. Plus, the iPhone maker repurchased more than $100 billion worth of its own stock in the past year alone, and it also pays a modest dividend.
Berkshire also has a small $2.1 billion position in another Magnificent Seven name: Amazon. Though it has a track record of growing its top and bottom lines nicely, Amazon isn't the perfect Buffett stock because the company doesn't pay a dividend, and it hasn't executed any buybacks since 2022. Plus, the stock isn't exactly cheap.
Alphabet ticks most of Buffett's boxes
Alphabet (GOOG -0.42%) (GOOGL -0.50%) is another Magnificent Seven technology stock that could be a great fit for Berkshire Hathaway's portfolio. It's the parent company of Google, YouTube, Waymo, and more, and it has most of the qualities Buffett normally looks for in an investment.
First, Alphabet has a spectacular long-term track record of growing its revenue and earnings per share (EPS).
Data by YCharts.
Second, Alphabet is returning significant sums of money to shareholders. Over the last four quarters alone, it distributed $9.8 billion in dividends and completed more than $61 billion worth of share buybacks.
Data by YCharts.
Third, Alphabet has a strong and stable management team led by Sundar Pichai, who joined the company in 2004 and has served as its CEO since 2015. Plus, Google co-founders Larry Page and Sergey Brin are still on Alphabet's board to ensure the company continues to head in the right direction.
The fourth and final reason Alphabet might be a good fit for Berkshire's portfolio is its valuation. The stock is trading at a price-to-earnings (P/E) ratio of just 19.4, which is cheaper than the broader market based on the 23.7 P/E ratio of the S&P 500 index. Plus, it's the cheapest Magnificent Seven stock by far.
Data by YCharts.
While Berkshire has never owned Alphabet stock, Buffett has definitely thought about it. In fact, during an interview back in 2017, he said his reluctance to invest during the company's earlier years was a mistake.
Alphabet faces some challenges, but it's already a leader in AI
Alphabet generates more than half of its revenue from selling advertising space to businesses adjacent to Google Search results, but that business is facing disruption from two angles. First, the U.S. Department of Justice recently won a court case against it over its anticompetitive behaviors. The end result of that case could be that Alphabet gets compelled to stop paying billions of dollars a year to Apple to make Google the default search engine on the browsers installed on devices like the iPhone.
The judge in the case has yet to hand down his ruling on penalties and remedies, and the company will certainly appeal his decision, but any result that erodes Google's 89.5% market share in the internet search industry could deal a blow to Alphabet's financial results, which might be one of the reasons its stock is so cheap right now.
The second challenge is AI. Chatbots like OpenAI's ChatGPT can provide direct answers to almost any query, whereas traditional search engines may point the user in the right direction, but still require them to sift through web pages to find the information they need. Alphabet is combating this threat with AI Overviews, which are AI-generated answers that appear above the traditional results in Google Search. The company hopes this will stop users from abandoning its search engine in favor of chatbots.
However, Alphabet hedged its bets by launching its own AI assistant, Gemini. It isn't just a stand-alone chatbot, because Alphabet also embedded it into Google Workspace applications like Gmail, Docs, and Sheets. This should reduce users' interest in venturing outside the Google ecosystem to find information from competitors like OpenAI.
In summary, Alphabet has become one of the clear leaders in AI, and that should help insulate it from potential disruption. However, investors like Buffett might feel the company's future is too uncertain to buy the stock with conviction. On the other hand, I think its cheap valuation offers sufficient compensation for the known risks.
