Berkshire's "buy Google" doesn't seem like Buffett's decision?

Buffett often advises investors, "Never invest in a business you cannot understand." However, the Berkshire Hathaway he leads recently made an investment that goes against this "house rule"—a significant stake in Google.

On November 21, according to an analysis by Nir Kaissar, founder of asset management company Unison Advisors and Bloomberg columnist, Berkshire Hathaway's latest investment in Google's parent company Alphabet simultaneously touches on two of Buffett's "taboos": opaque technology and excessive valuation.

Combine opaque technology with high valuations, and you are sure to lose Buffett.

In his view, this Google deal directly challenges Buffett's golden rule of "not investing in businesses you don't understand," a principle that helped Berkshire successfully avoid the internet bubble of the late 1990s.

More critically, the high purchase price is another point of concern. The article analyzes that measuring by free cash flow (rather than earnings) better reflects the massive capital expenditures of tech companies in the AI field.

The valuation level of this investment is also unusual. Berkshire paid about 40 times the tracking free cash flow (FCF) for Alphabet, far exceeding the S&P 500 index's average of about 26 times since 1991.

Kaissar believes that paying such a high premium for a company that relies on "unproven technology" is a typical "non-Buffett-like" move.

A New Strategy from the Successor?

According to Berkshire's latest disclosed holdings, the company has newly built a position of 17.84 million shares in Google's parent company Alphabet, making it its tenth-largest stock.

The timing of this transaction coincides with a critical moment of power transition at Berkshire, as Buffett is set to step down at the end of the year. Kaissar speculates that Greg Abel, who is about to take the helm of the company, may have played a key role behind the scenes. This decision could signal a significant shift in Berkshire's investment strategy.

Kaissar states that if this speculation holds true, it will showcase a "radically different approach from what Berkshire shareholders are accustomed to." The core of this new approach is a willingness to "pay more now for potentially higher growth in the future," which is precisely the kind of risk Buffett "rarely takes, even if he has before."

This bet also places Berkshire directly in the center of the current fierce debate on Wall Street about whether "AI trades are overhyped."

Growth Bet Under High Valuation

Kaissar believes that the combination of high valuation and opaque technology is typically a combination Buffett would avoid. The investment in Alphabet is essentially a bet on future growth.

He analyzes that to bring its valuation back to a reasonable level, Alphabet needs to achieve an average annual growth of 13% to 23% in free cash flow over the next three to five years. However, Alphabet's profitability provides limited support, with last year's free cash flow margin at about 19%, and Wall Street expects it to remain at the same level this year In contrast, AI chip leader NVIDIA, although valued higher (over 60 times free cash flow), boasts an "extraordinary" profit margin of 44%, which provides a stronger impetus for achieving high growth. Nevertheless, some investors remain cautious about the AI outlook, as a recent survey of institutional investors revealed that 45% of respondents believe the AI bubble is the biggest risk in the market.

The article concludes that while the AI giants may not be a bubble, determining which company can stabilize investors before achieving large-scale growth is undoubtedly a "gamble." This investment in Alphabet seems to indicate that Berkshire's new generation of leaders is ready to participate in this game