Berkshire "buying Google" doesn't seem like Buffett's decision?
Buffett often warns investors, “Never invest in a business you don't understand.” However, Berkshire Hathaway, under his leadership, has recently made an investment that goes against this “house rule”—building a large position in Google.
On November 21, according to the analysis of Nir Kaissar, founder of asset management firm Unison Advisors and Bloomberg columnist, Berkshire Hathaway’s latest investment in Google’s parent company Alphabet has simultaneously touched two of Buffett’s “forbidden zones”: opaque, hard-to-understand technology and excessively high valuation.
Combine opaque technology with lofty valuations, and you’re sure to lose Buffett.
In his view, this Google deal directly challenges Buffett’s golden rule of “not investing in businesses you can't understand”—a principle that previously helped Berkshire successfully avoid the Internet bubble of the late 1990s.
More importantly, a high purchase price is another area of doubt. The article analyzes that measuring by free cash flow (rather than profit) better reflects tech companies' massive capital expenditures in AI.
The valuation of this investment is also extraordinary. Berkshire paid around 40 times trailing free cash flow (FCF) to buy Alphabet—far higher than the S&P 500’s average of about 26 times since 1991.
Kaissar believes that paying such a high premium for a business reliant on “unproven technology” is a classic “non-Buffett” move.
New Strategy from Successors?
According to Berkshire’s latest portfolio disclosure, the company established a new position of 17.84 million shares of Alphabet, Google’s parent company, instantly making it Berkshire’s tenth largest stock.
This deal’s timing coincides with a key moment of power transition at Berkshire, as Buffett is set to step down at the end of the year. Kaissar speculates that Greg Abel, soon to helm the company, may have already played a critical role behind the scenes. This decision may signal a significant shift in Berkshire’s investment strategy.
Kaissar states that if this speculation holds true, it shows the market an approach “completely different from what Berkshire shareholders are used to.” The essence of this new approach lies in being willing to “pay more now for possibly higher future growth”—a risk that Buffett “rarely, if ever, would take.”
This bet also places Berkshire directly at the heart of Wall Street’s heated debate about whether “AI trades are overdone.”
A Bet on Growth Amid High Valuations
Kaissar thinks the combination of high valuations and opaque technology is usually something Buffett would avoid. The investment in Alphabet is, in essence, a bet on future growth.
He analyzes that for its valuation to return to reasonable levels, Alphabet needs to achieve annual free cash flow growth of 13% to 23% over the next three to five years. Yet Alphabet’s profitability offers limited support, as its free cash flow margin last year was about 19%, and Wall Street expects it to remain at that level this year.
By comparison, AI chip leader Nvidia, though commanding an even higher valuation (over 60 times free cash flow), has a “remarkable” profit margin of 44%, giving it much stronger momentum for high growth. Even so, some investors remain cautious about the AI outlook—a recent survey of institutional investors showed 45% of respondents see the AI bubble as the market’s greatest risk.
The article concludes that while AI giants may not be in a bubble, judging which one will satisfy investors before large-scale growth occurs is undoubtedly “a gamble.” Berkshire’s investment in Alphabet seems to suggest that its new generation of leaders are ready to join the game.
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