After loading up on Apple (AAPL, Financial) shares, could Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) buy Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) shares next? Alphabet has been bought aggressively by multiple famous gurus. Buffett and Munger have commented favorably on the company's competitive position several times. The latest Berkshire shareholder letter indicates Buffett is very knowledgeable about the technology space.
The fact that so many value investors are buying Alphabet at current multiples indicate it is a great business at a fair price. It is not immediately obvious how popular the stock is because Alphabet trades an A and a C share class, which are treated as seperate companies by lists put together through automation. They are economically equivalent, however, and if you add them up, Alphabet is one of the highest-owned stocks among the great investors tracked by GuruFocus.
Back in 2009, Warren Buffett (Trades, Portfolio) talked about IBM (IBM, Financial), Apple and Google:
"The chances of being way wrong in IBM are probably less, at least for us, than the chances of being way wrong in Google or Apple. I just don’t know how to value them.
I would not be at all surprised to see them be worth a lot more money 10 years from now but I would not buy either one of them. I sure as hell wouldn’t short them either."
In addition, Charlie Munger (Trades, Portfolio) said:
"Google has a huge new moat. In fact, I've probably never seen such a wide moat."Â
Munger added it was also filled with sharks. It is impossible to assess a moat without understanding competitors and their chances to successfully assault a company’s market share. In this case, Munger might have seen the potential early while Buffett remained unconvinced. Buffett has alluded to his biggest mistakes as acts of omission.
Bill Gates, former Microsoft (MSFT, Financial) chairman and a good friend of Buffett, stepped down in 2014. Microsoft runs the only real competition to Google search. Gates stepping down may have freed Buffett to learn about that competitive landscape from him.
In additon, Google founders Larry Page and Sergey Brin and Chairman Eric Schmidt traveled to Omaha to talk to Buffett when setting up the new Alphabet structure, which is molded after Berkshire.
Shortly before the trip, they brought in CFO Ruth Porat, who understands the tech founders' goals for the company.
Buffett included the following paragraphs in the 2017 shareholder letter, putting my spider senses on red alert:
"In 2002, entrepreneur Mitch Kapor asserted that 'By 2029 no computer – or ‘machine intelligence’ – will have passed the Turing Test,' which deals with whether a computer can successfully impersonate a human being. Inventor Ray Kurzweil took the opposing view. Each backed up his opinion with $10,000. I don’t know who will win this bet, but I will confidently wager that no computer will ever replicate Charlie.
That same year, Craig Mundie of Microsoft asserted that pilotless planes would routinely fly passengers by 2030, while Eric Schmidt of Google argued otherwise. The stakes were $1,000 each. To ease any heartburn Eric might be experiencing from his outsized exposure, I recently offered to take a piece of his action. He promptly laid off $500 with me. (I like his assumption that I’ll be around in 2030 to contribute my payment, should we lose.)"
This paragraph shows Buffett has been studying the tech world very hard and is open to the possibility the Turing test will be cracked by 2029. He also must have looked into the dynamics of driverless or pilotless technology, note the recent investment into airlines, to take on a $500 bet. I do not think betting against Buffett is generally a profitable endeavour. What jumped out at me is, apparently, Alphabet’s chairman and Buffett recently spoke again. They must have spoken for quite some time for the subject of this casual bet to come up.
All these factors have led me to speculate on the potential of an Alphabet investment.
- The pieces are falling into place.
- Buffett has been studying tech intensely.
- Berkshire has made a 180 as far as tech investments go.
- Buffett and Munger view Alphabet as having an incredibly strong moat.
- Alphabet's valuation is at an attractive level given the interest from the value investing greats. Porat is a great addition to the executive suite ,covering up pre-existing weaknesses in the team.
- Google executives have met with Buffett on multiple occasions and Schmidt talked to him recently.
The one thing I could see keeping Buffett from making an investment is his distaste for stock-based compensation. Alphabet continues to dole it out like it is candy on Halloween.
I would go as far as to say it would greatly surprise me if we do not see Berkshire buying a stake in Alphabet in the next five years.
Disclosure: Author owns none of these stocks.
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