Keithen Drury, The Motley Fool
5 min read
In This Article:
-
Alphabet meets many of Warren Buffett's investment requirements.
-
Alphabet faces some headwinds that could be difficult to overcome, but not impossible.
Warren Buffett, the long-time CEO of Berkshire Hathaway, (NYSE: BRK.A) (NYSE: BRK.B), is known to avoid investing in companies that he doesn't understand and is not one to invest in cutting-edge technology. You can't fault the strategy when you consider Buffett's extraordinary career, which is coming to a close this year.
But that doesn't mean individual investors can't apply Buffett's investing principles to various AI companies to identify stocks that would interest him if he were an AI investor. There's one company that checks all of Buffett's primary boxes when looking for a stock, and it's right under everyone's nose.
Buffett is a value investor at heart, and he likes businesses that generate a ton of cash flow. Brand value is another item that he considers. But perhaps the biggest factor is the price he must pay for a stock. Buffett doesn't like overpaying for businesses and prefers to buy them at a discount to where they should be trading.
One company checks all of these boxes: Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
Alphabet's brand value can't be disputed, as its properties like Google, YouTube, and the Android operating system are at the top of their respective industries (Android is much more popular outside of the U.S.). It's also a free-cash-flow-generating machine, turning 21% of revenue into free cash flow over the past 12 months. This number is a bit deflated due to Alphabet's massive investments in building data centers meant for AI and cloud computing. Still, these expenses will eventually drop, which will cause Alphabet's FCF to explode higher.
Lastly is Alphabet's price tag, which is incredibly cheap compared to its peers.
At 19 times trailing earnings and 18 times forward earnings, Alphabet's stock is at some of the cheapest levels it has reached in some time. Alphabet's stock looks quite inexpensive compared to the broader market (as measured by the S&P 500, which trades at 22.4 times forward earnings).
With Alphabet checking those three primary boxes for Buffett, it may be a stock he'd consider buying if he were an AI investor, but there may also be some reasons to stay away.
There's a reason that Alphabet's stock has gotten this cheap, and it has to deal with three primary issues:
