Warren Buffett has backed a winner in Alphabet, and there’s a bigger market risk than a crash in AI stocks, Tom Russo says.
The veteran investor and managing member of Gardner Russo & Quinn is well placed to weigh in. His firm’s top two holdings at the end of September were a $1.1 billion stake in Alphabet and a $1.8 billion stake in Buffett’s Berkshire Hathaway, together accounting for 31% of its $9.3 billion US stock portfolio, regulatory filings show.
Berkshire purchased 17.8 million shares in Google’s parent company, worth $4.3 billion as of September 30, its third-quarter portfolio update revealed last week. The stake surprised many of Buffett’s close followers, as the famed bargain hunter has eschewed technology stocks for most of his career.
Buffett — or one of his two investment managers, Ted Weschler and Todd Combs — may have bet on Alphabet before it surged, Russo told Business Insider.
Its stock price rose nearly 40% in the three months ending September 30, from under $180 to $244, and has climbed another 17% since then to clear $285. If Berkshire bought in early last quarter, it may have only paid $3.1 billion or so for a position worth $5.1 billion as of Monday’s close.
Even after its recent jump, Alphabet continues to trade at a “below-market” price-to-earnings ratio, Russo said, hailing the company as a “remarkably solid and strong business.”
Russo outlined what may have spurred Berkshire to bet on the search-and-advertising titan behind YouTube, Waymo, DeepMind, and Android.
He said that Alphabet has long shown a “capacity to suffer” — a willingness to make long-term investments that constrain short-term profits, and not cave into Wall Street’s demand for smooth earnings growth each quarter.
Russo and his team “look right through” Alphabet’s heavy spending on research and development to determine its potential profitability, he said. They also “applaud” its open commitment to funding so-called moonshots, or speculative tech bets with the potential to pay off enormously, he added.
Alphabet also has a “mountain of cash” like Berkshire thanks to the powerful cash generation of its operations, and its position as one of the biggest players in AI could yield huge financial rewards, he said.
Nati Harnik/Associated Press
However, Russo said there’s a risk that Alphabet’s large investments in AI don’t generate the scalable, superior returns that can “drive the payback” like its past initiatives have. The company has projected its capital expenditures in 2025 will exceed $90 billion.
There’s also a danger that the era of “extraordinary margins” for Alphabet’s search business is over, despite the company enhancing it with its Gemini AI, he added.
Russo said that Alphabet is “mischaracterized” as simply a tech company, when it plays a critical role in helping businesses become more precise, effective, and efficient in reaching their target customers.
“You get that right and people beat a path to your door,” he said.
Alphabet is also “deeply embedded in the commerce of the world,” which could help it to fend off the next generation of rivals even if they have technological advantages, he said.
Debt, disruption, and decline
Away from Alphabet, Russo said the fallout from the mushrooming US debt could be “potentially more disruptive” than a collapse in AI stocks.
America’s national debt has nearly doubled within the past decade, soaring from below $20 trillion in 2016 to over $38 trillion today, Treasury data shows.
The “pressure” to service that debt, and growing threats to the US dollar’s status as the world’s reserve currency, are paving the way for a weaker, less influential greenback, Russo said.
He said the “more unexamined” area where “financial disruption” could occur might be in the bond and currency markets, and the wider macroeconomic and political spheres.
“Those who hold our claims have interests that go far beyond just lending to the US, but really supplanting it,” he said.
America’s leading position in the world has powered increases in its citizens’ living standards and supported global stability for decades, he said. Retreating from the world stage could stymie further gains and prove destabilizing, he cautioned.
“Never should somebody give their consumer the opportunity, the incentive to look elsewhere for satisfaction,” Russo said, paraphrasing Buffett’s late business partner, Charlie Munger.
