Warren Buffett was a legendary investor who brought Berkshire Hathaway (BRKA +0.97%) (BRKB +0.89%) to the prominent position it holds now. It has one of the most well-respected portfolios assembled in the investing world, and Buffett's knowledge and wisdom have guided many investors. While Buffett may be retired, investors can still learn from how he invested, as his successor, Greg Abel, hasn't done much to change the strategy or positions since Buffett retired last year.
While Buffett wasn't known to be a cutting-edge tech investor, he did purchase one major player right before he retired: Alphabet (GOOG +0.87%) (GOOGL +0.97%). Abel also saw further value in Alphabet and added more to Berkshire's stake in Q2 as well. Clearly, Buffett and Abel saw huge potential in Alphabet's stock and chose to invest more. But why are they buying it? Let's take a look.
Image source: The Motley Fool.
Alphabet checks many of Buffett's investment boxes
Buffett was known to be a pretty basic investor. He wouldn't invest in businesses that he didn't understand. Alphabet may do a bunch of advanced things, but at its core it's a pretty simple business. Alphabet is a marketplace for advertisements on its platforms and generates billions in ad revenue across its platforms. Among the properties it owns are Google and YouTube, some of the most utilized websites across the entire internet.
Another rising part of Alphabet's business is its cloud computing segment. While cloud computing can be utilized for several advanced technologies like AI training and inference, it's really just a rental business. Alphabet builds excess computing capacity and then rents that out to clients.
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Key Data Points
Another segment of Alphabet is its investment wing. Alphabet has made several impressive investments, with Space Exploration Technologies and Anthropic being two that have made a boatload of profits (at least on paper) for Alphabet. Berkshire would admit that it doesn't have the expertise necessary to invest in cutting-edge companies like these two, so investing in Alphabet, which does those activities quite well, makes for a smart move.
Alphabet is a perfect fit for Berkshire's portfolio from a business perspective, and it's no wonder that Alphabet has become the company's third-largest position when both Alphabet share classes are combined. But Buffett and Abel are still staunch value investors, so is there still value in Alphabet's stock today?
Alphabet is far cheaper than Berkshire's top holding
The reality is that Buffett may not be as staunch a value investor as some may have you believe. Perhaps his most impressive investment is Apple, which turned Berkshire into the giant it is today. While he bought the stock when it was trading at a very cheap valuation, Apple is now one of the most expensive big tech stocks in the market. Still, Apple has maintained its position as Berkshire's largest holding despite the firm trimming some of its position.
If we value Apple and Alphabet's stock utilizing next year's earnings projections, the difference in valuations becomes quite stark.
GOOG PE Ratio (Forward 1y) data by YCharts
Apple holds a 50% premium over Alphabet, while it trades for about 23 times next year's earnings, which isn't necessarily a cheap price tag itself. Still, I think Alphabet has a great foothold in many industries, including AI. This could be how Berkshire is choosing to position itself to benefit from AI, and I think Alphabet is as good a horse as any to back in the AI race.
Buffett did a great job by purchasing Alphabet shares before he retired, and Abel has continued purchasing shares during his tenure. If Alphabet is a good enough investment for one of the most prominent investment firms in the world, then it's probably a smart investment for individuals.
