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Berkshire Hathaway is selling more Apple and buying Alphabet.
Alphabet is becoming an AI winner with its improvements to Google Search and its Gemini chatbot.
The stock has soared in recent months but still trades at a reasonable price.
Warren Buffett and Berkshire Hathaway (NYSE: BRK.B)(NYSE: BRK.A) continue to sell Apple stock, increasing the company's cash position to close to $400 billion. One stock Berkshire is buying is Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). The technology giant and leading artificial intelligence (AI) stock has been a favorite of Buffett and the team for years, although they have never bought the stock. That is, until last quarter, when Berkshire Hathaway bought over $4 billion worth of the company that owns Google Search, YouTube, Waymo, and the Gemini AI chatbot.
Does that mean you should follow Berkshire Hathaway and buy Alphabet stock for your own portfolio today?
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »
Image source: Getty Images.
After the launch of OpenAI's ChatGPT, Google and Alphabet were deemed AI losers by Wall Street. Even though Alphabet was on the cutting edge of AI research, it was losing ground (and quickly) to ChatGPT and its viral growth. Investors were concerned that the company's cash cow, Google Search revenue, would decline, potentially leading to a weakening company.
Today, it is clear that these concerns were misguided. Alphabet has fought back aggressively against the AI start-ups with its own Gemini chatbot, which has rapidly grown to 650 million monthly active users (MAUs), while the company implements new AI overviews for Google Search results to improve the user value proposition. These AI developments enabled Google Search revenue to grow close to 15% year over year last quarter to $56 billion, likely with extremely high profit margins (Alphabet doesn't break out specific Google Search margins).
What has become a risk to the business is now an advantage. Alphabet keeps taking market share of AI chatbots, and has wholly owned infrastructure in computer chips and data centers that enable it to rapidly scale up usage without breaking the bank. This is something the start-up competitors do not have. In fact, competitor OpenAI recently went to Google Cloud to buy compute power for ChatGPT, a clear example of Alphabet's infrastructure advantage in this space.
What's great about Alphabet is that it is much more than just Google Search. There is the YouTube business, which is doing over $10 billion in advertising revenue every quarter, along with steadily growing subscription revenue. Total Google subscriptions -- which include YouTube, Google Drive, and Gemini subscriptions -- hit $12.8 billion last quarter and are growing 21% year over year.
There is also the self-driving taxi network Waymo. It is not relevant from a revenue perspective today, but it is scaling rapidly across the country and entering new cities on a regular basis. Rides are growing exponentially and could become a driving force for Alphabet's business over the long term. The gem of growth today is Google Cloud, doing $15 billion in revenue last quarter and growing 34% year over year.
This is the division that OpenAI is buying computing power from, among many other AI start-ups. With demand expected to soar for AI in the coming years, Google Cloud has a good opportunity to keep growing its revenue at such an aggressive rate through the rest of the decade.
Data by YCharts.
Berkshire Hathaway took a stake in Alphabet back in the third quarter, when the price of the stock may have been closer to $200 a share. Today, Alphabet trades at close to $290.
Does that mean the stock is now expensive? I don't think so. Alphabet has a trailing price-to-earnings ratio (P/E) of 28, which is below the S&P 500 index average right now. Its revenue keeps growing quickly, and it has the potential for massive operating leverage once its new AI initiatives start catching up in revenue generation. Even though Buffett and the team bought this stock at a lower price, Alphabet looks like a solid bet for any investor hunting for a Magnificent Seven stock to buy today.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
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