Any time Warren Buffett's Berkshire Hathaway (BRK.A +0.33%) (BRK.B +0.22%) adds a new investment to its stock portfolio, it tends to grab attention. And because Berkshire has been much more of a seller of stocks than a buyer of them over the past two years, the company's portfolio additions are likely to draw even more interest.
Berkshire's latest Form 13F filing revealed that in the third quarter, the conglomerate opened an approximately $5 billion position in Alphabet (GOOGL +0.28%) (GOOG +0.24%), which also happens to be one of my favorite stocks. Whether the soon-to-retire Buffett or his successor, Greg Abel, was behind that decision is unknown, but back in 2017, Buffett famously admitted that he wished he had invested in the company then called Google years earlier, when he saw that one of his insurance subsidiaries, Geico, was paying it $10 to $11 per click.
Let's look at what Berkshire Hathaway may see in Alphabet today, and why its portfolio managers decided now was the right time to invest.
Image source: Getty Images.
A wide moat and growth opportunities
With the rise of the artificial intelligence (AI) trend, Alphabet's Google search engine is facing serious and intensifying competition for the first time in a very long time. However, the company still has a wide moat in this area. The search and AI chatbot businesses are currently merging together into what I'd describe as the "discovery" business. And in that space, Google has a couple of powerful advantages.
NASDAQ: GOOGL
Key Data Points
Before I get into those advantages, it should not be overlooked that Alphabet has developed one of the world's top foundational large language models (LLMs) in Gemini, which competes with the top models from OpenAI and others. Gemini, as a stand-alone app, has been taking market share, helped by the popularity of its Nano Banana AI image-editing tool.
But Alphabet's biggest advantage is distribution. It owns both the world's leading browser (Chrome) and the world's leading smartphone operating system (Android). Both command global market shares of more than 70%. It also has a search-revenue sharing deal with Apple that makes Google the default search engine on its devices. This essentially makes Alphabet the gateway to the internet for most people outside of China.
At the same time, the company has infused Gemini and other AI enhancements across its search solutions. AI features such as Lens, Circle to Search, and AI Overviews are helping drive query growth. Meanwhile, it has just started rolling out AI Mode, which lets users easily toggle between traditional search results and an AI chatbot experience. This is a powerful tool, as users don't have to change their behavior and use a separate app.
Alphabet's ad network is another huge edge. The company has spent decades building one of the most comprehensive digital ad networks on the planet -- one that can just as easily handle a local campaign from a small merchant as a global campaign from a major brand. Advertisers know its platform works, and they tend to stick with what they know will be successful. Many of its competitors, meanwhile, are still trying to figure out their business models and are burning through cash.
Beyond search
Outside of search, Alphabet also has what is arguably the best-positioned cloud computing platform on the planet. It has the most complete tech stack, which should be a long-term differentiator. Gemini is one of the world's leading foundational AI models, and the company has top software platforms, such as Vertex AI, to help customers create and customize their own AI models based on its Gemini foundational model. However, it doesn't stop there.
Perhaps the company's biggest edge in cloud computing comes from its custom AI accelerator chips, which it calls tensor processing units (TPUs). While other companies are starting to invest in custom AI chips, Alphabet has spent more than a decade developing its TPUs, which are now in their seventh generation. This has helped put it far ahead of the pack in its efforts, and gives it a big advantage in cost and power efficiency for certain types of AI workloads, particularly relative to more general-purpose graphics processing units (GPUs). As inference becomes a larger and larger share of the total AI-related computing workload, this will give Alphabet a huge advantage, especially given that access to enough electricity to power data centers is one of AI's biggest bottlenecks.
In addition to cloud computing, Alphabet also owns YouTube, the world's most-watched streaming service, which continues to generate solid growth. It also has some promising emerging bets. It has made real progress in quantum computing, meaningfully reducing that technology's error rate with its Willow chip, while its Waymo robotaxi business is expanding rapidly.
Trading at a forward price-to-earnings (P/E) ratio of around 25.5 times 2026 analyst estimates, Alphabet isn't expensive for a company with all it has to offer. As such, investors can feel comfortable following Berkshire Hathaway's lead and buying the stock now.
