This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Warren Buffett's Berkshire Hathaway bought Alphabet stock for the first time in the third quarter.
- The buy quickly became Berkshire's 10th-largest position.
- A key data point in the third quarter likely led to the purchase.
Warren Buffett's conglomerate Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) just filed its 13F filing last Friday, revealing a new position in Google parent Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). In the third quarter, Berkshire bought $4.3 billion worth of Alphabet shares, making the Search giant Berkshire's 10th-largest equity position.
The move is in some ways surprising, but in other ways not. While Buffett has generally eschewed technology stocks, Berkshire's largest equity position has been Apple (NASDAQ: AAPL) since 2017. Additionally, Buffett and his late partner Charlie Munger have discussed "missing" the opportunity to buy Alphabet in the past. So some may have concluded Berkshire would never buy Alphabet.
Still, Alphabet entered the year as the cheapest of the "Magnificent Seven" stocks, due to a specific fear around the disruption of its Search business. That's why the timing of Berkshire's purchase likely came due to one specific data point that emerged in Q3.
The fears over Alphabet's Search franchise
Although Alphabet's stock has had a great year, with a total return of 46% year to date, Alphabet's stock had actually been negative on the year until late July, when the company released its third-quarter earnings report.
Coming into the year, Alphabet traded cheaper than peers, at around 20 times earnings. Investors might have been surprised at that below-market valuation, given Alphabet's multifaceted businesses, including Search, YouTube, Google Cloud, and next-generation technologies such as self-driving car service leader Waymo, as well as world-class artificial intelligence (AI) research.
However, investors had also grown nervous over the rise of AI chatbots, and with it, the threat that AI chatbot usage may begin to displace Google Search activity. If that were to occur, it could be very problematic for Alphabet. While Alphabet has done a great job of nurturing other businesses over the years, a large percentage of the company's profits still comes from Search ad revenue.
Those fears were augmented earlier in the year, when Alphabet's first-quarter paid click growth rate decelerated to just 2%. That marked a deceleration from the 5% paid click growth the company saw in 2024. While not a negative number, the downward trend in growth certainly fueled the fears that Search volume might eventually decline.
Search reaccelerated in Q2
While we don't know exactly when Buffett decided to buy shares, or even if it were Buffett himself or one of his younger lieutenants Todd Combs and Ted Wechsler, the purchase might have come following Alphabet's second-quarter earnings release in late July.
That's when Alphabet trounced analyst expectations for revenue and earnings, while also disclosing a 4% paid click growth rate.
That reacceleration from the first quarter could have been a key proof point that Alphabet's efforts to sustain the Search franchise were working. In 2024, Alphabet unveiled "AI Overviews" when customers used Search, providing an AI-powered summary to questions at the top of Search results. Then in the second quarter of 2025, Alphabet took Search innovation one step further, introducing "AI mode" in May to over 200 countries and territories. AI mode, powered by Google's Gemini LLM, is basically an option to get a chatbot-like experience within Google Search.
The fact that Alphabet introduced AI mode in May and subsequently saw a reacceleration in paid clicks on Search could have meant Alphabet's Search enhancements were leading to more engagement within the established Search ecosystem.
While chatbot usage is definitely on the rise, Google Search is still a daily habit for literally billions of people. So as long as Alphabet can innovate and keep pace with AI leaders with its underlying Gemini large language model, its current distribution advantage over AI start-ups should keep many within the Search ecosystem, preserving that franchise and the cash flows that come with it.
While we can't know exactly why Buffett & Co. purchased Alphabet stock in the third quarter, the reacceleration of Search likely put some of the overhanging fears on Alphabet to bed, removing a big risk.
Search clicks should continue to be scrutinized
Fortunately for Buffett, Alphabet stock has continued to appreciate since that second-quarter release. But perhaps even more important than the stock price appreciation, third-quarter results were also excellent. And even more important than overall Q3 results was the fact that paid clicks continued to accelerate, rising 7% year over year, a three-point acceleration over Q2 and a five-point acceleration from Q1.
Even better is that Alphabet still trades at a very reasonable 28 times trailing earnings, which is still a cheap valuation for a company with high AI-fueled growth prospects. With the core Search franchise intact, its Cloud unit now experiencing high and profitable growth, and self-driving unit Waymo recently extending its lead over would-be competitors, Buffett's Alphabet purchase in the third quarter is beginning to look like another in a long line of very savvy investments.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
