Buffett’s Bet on Alphabet: He’s Timed Magic, Again, At 95 Years Old

Warren Buffett will be officially stepping down as Berkshire Hathaway’s (NYSE:BRK-B) CEO in a little over a month. But until he’s out of his seat, Buffett appears to be very willing to make big moves within his portfolio that will benefit other generations down the line.

Berkshire’s impressive $4.9 billion bet on Alphabet (NASDAQ:GOOG) has actually been increased of late, suggesting that the Oracle of Omaha and his team are more bullish on this high-growth tech stock than they initially were during their 13-F filing Wall Street is talking so much about right now. 

I’m of the view that this move is representative of another example of the master class Warren Buffett continues to put on for the broader market and investors of all stripes. Here’s why I think he’ll ultimately be very right on his Alphabet pick, and why this stock is still attractive at current levels. 

Why Now?

Many investors may certainly be asking the key question – if Alphabet looks attractive today, what about a few years back when it was trading at much lower levels (and in some respects, lower valuation multiples)? 

I think the decision has come amid Buffett’s move to trim his Apple (NASDAQ:AAPL) position. Given the fact that we now live in a tech-driven economy, even the most cautious and defensive investors of all time appear to recognize the importance of owning a slice of the growth engine of the U.S. economy. And as Buffett has long said, this is an economy that’s not worth betting against for any extended period of time. 

For those bullish on the future of data growth, cloud usage, and yes artificial intelligence, Alphabet looks like one of the highest-quality ways to play these trends at the most reasonable valuation. That’s a recipe Buffett has clearly relied on for his past multi-bagger winners. And given Alphabet’s central role in the world of AI and cloud computing technology, there’s a lot to like about its growth prospects over the long-term relative to other mega-caps.

It’s a Fundamental Story Once Again

Warren Buffett has long espoused the idea of buying excellent companies at reasonable prices over buying reasonable companies at excellent prices. I think his recent Alphabet purchase is emblematic of this view, considering that Alphabet currently trades at a forward price-earnings ratio of 25-times. That’s not necessarily cheap, or in traditional Buffett territory. But relative to where the other tech giants such as Apple are trading, it’s a relative bargain. 

And with recent results suggesting that forward earnings forecasts may be understating Alphabet’s potential, perhaps this stock is cheaper than it appears. The company brought in $3.10 in EPS this past quarter, absolutely crushing expectations of just $2.33 in earnings per share. Revenue also beat estimates by more than 2%, but it’s this highly profitable growth I wouldn’t be surprised if Warren Buffett was watching more closely.

As the company’s cloud growth continues to drive the boat (up 35% year-over-year), any sort of AI-related uptick could mean this stock is actually mis-priced by the market right now. Buffett seems to think so, and I agree. 

The Verdict

I’m going to be the last person on the planet to criticize Warren Buffett about any of his moves. In terms of his overall portfolio of work over many decades, he’s hit more home runs than he’s struck out. If this was a batting average competition, Buffett beats nearly any investor of our time, and that record will go down as one of the best we’ve ever come across. 

It’s entirely possible that Buffett could be rotating out of Apple and into Alphabet at the wrong time – after all, Apple has surged of late (alongside Alphabet). I’ll be curious to watch both companies and their performance in the coming years, for sure.

And while Buffett still owns a hefty chunk of Apple stock despite his trimming, this recent addition will be interesting to watch from the perspective of any future Berkshire purchases of GOOG stock. If Berkshire decides to move toward Alphabet as a core long-term holding, I think the stock’s recent reaction to this news could be muted. This is a long-term gem worth holding that now has Buffett’s blessing – that matters a great deal to millions of investors out there (like me).