Warren Buffett’s interest in technology, particularly in artificial intelligence, has recently taken a notable turn. After being introduced to ChatGPT by his longtime friend Bill Gates in 2023, Buffett expressed admiration for the chatbot’s capabilities, recognizing its potential to significantly enhance productivity for users. Despite this newfound interest, Buffett has historically been cautious about investing in technology firms, and his company, Berkshire Hathaway (BRK.A +0.29%) (BRK.B +0.51%), had not made any direct investments in the generative AI space since the launch of ChatGPT, until the last quarter.
In its third-quarter Form 13F filing with the SEC, Berkshire disclosed a purchase of 17.8 million shares in Alphabet (GOOGL +0.06%) (GOOG 0.05%), a stock that Buffett has regarded as a missed opportunity since at least 2018. While it remains uncertain whether Buffett himself made the decision or if it was one of Berkshire’s investment managers, Alphabet has now become the company’s 10th-largest U.S. stock holding.
Alphabet represents a departure from the more straightforward investments Buffett typically favors, given its complex business model. The company operates vital services like Google Search and YouTube, which dominate in web traffic, alongside a burgeoning public cloud computing division. This diversification is complemented by Alphabet’s robust advertising revenue, which has made the company a significant cash generator, pulling in $73.6 billion in free cash flow over the past year despite heavy investments in AI infrastructure.
Berkshire’s investment comes at a time when Alphabet is experiencing improved operating leverage in its cloud segment—operating margins surged to 24% last quarter, up from 17% a year prior. This impressive performance has helped drive overall earnings growth, even as competition from AI-driven chatbots has intensified in the search market.
Alphabet’s stock was trading at a forward price-to-earnings (P/E) ratio of less than 20 for a significant portion of the third quarter, a valuation that increased to above 24 following a favorable court ruling in Alphabet’s antitrust case. Nevertheless, this valuation still appears reasonable for a company that has seen its earnings per share grow by 35% year-over-year in the first three quarters of the year, with encouraging signs for continued growth.
Since September, Alphabet shares have surged, buoyed by the court ruling that allows the company to maintain its default search engine agreements with web browsers. This ruling is pivotal for Google’s continued dominance in search. The recent third-quarter earnings report exceeded expectations, revealing a startling 82% year-over-year surge in cloud backlog—an indicator of strong demand that has prompted management to revise its capital expenditure budget for the year from an initial estimate of $75 billion to between $91 billion and $93 billion.
Alphabet’s growth narrative was further bolstered by positive feedback on its Gemini 3 AI model, which reportedly surpassed competitors from Anthropic and OpenAI in nearly every benchmark test. Gemini plays a crucial role in ensuring Google’s relevance in the evolving landscape of AI, enhancing its search functionalities and licensing opportunities.
The stock’s momentum was amplified by reports suggesting that rival Meta Platforms is exploring arrangements to utilize Alphabet’s Tensor Processing Units (TPUs) in its data centers, further solidifying Alphabet’s position in the AI ecosystem. The collaboration with Anthropic to power future workloads using TPUs adds another layer of potential growth to Google Cloud’s expanding portfolio.
Despite these positive indicators, some challenges loom on the horizon. Alphabet’s substantial investments in data centers will result in increased depreciation, which could affect margins in the coming years. However, this concern might be mitigated by the scaling advantages of Google Cloud and the sustained growth of its high-margin advertising business. Overall, a forward P/E ratio of around 30 remains attractive given Alphabet’s performance and the trajectory of its AI initiatives.
As Buffett’s investment in Alphabet underscores a strategic shift towards technology, it highlights the increasing importance of AI in the investment landscape, suggesting that the convergence of traditional investing strategies with cutting-edge technology will continue to reshape market dynamics.
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