Buffett’s Google Bet: Two Decades After Inspiring Search IPO

In Google’s IPO prospectus over two decades ago, founders Larry Page and Sergey Brin openly acknowledged the influence of Warren Buffett, suggesting in their letter to prospective investors that the legendary value investor was a major source of inspiration.

Their founders’ letter, titled “‘An owner’s manual’ for Google’s shareholders,” explicitly stated that the concept was heavily influenced by Buffett’s essays in his annual reports and his “An Owner’s Manual” to Berkshire Hathaway shareholders.”

Now, more than two decades later, the admiration appears to be mutual. Berkshire Hathaway, Buffett’s conglomerate, recently disclosed a significant stake in Google’s parent company, Alphabet, worth approximately $4.3 billion as of the end of the third quarter. This places it among Berkshire’s top 10 largest equity holdings.

This move represents one of Berkshire’s most notable forays into the technology sector in recent years, with Apple remaining their largest tech investment. News of the stake propelled Alphabet shares upward by 3% on Monday, reflecting investor confidence in Buffett’s endorsement.

Berkshire’s investment signals a potential shift in its investment strategy, historically characterized by a preference for established, value-driven companies over high-growth tech firms. While Berkshire initiated a position in Amazon in 2019, the Alphabet investment represents a deeper commitment to a company at the forefront of artificial intelligence and cloud computing. The move also comes as Warren Buffett is preparing to step down as CEO at the end of this year, with longtime lieutenant Greg Abel set to take the reins, raising questions about the implications for investment strategies under new leadership.

Buffett himself has previously expressed regret for not investing in Google sooner, citing the substantial advertising expenses incurred by Berkshire’s insurance subsidiary, Geico, on Google’s advertising network. He also admitted to missing the early growth stages of Amazon, highlighting a potential blind spot in assessing the value of disruptive tech companies.

Alphabet shares are currently trading near their all-time high, boosted by a strong performance this year with a 50% increase. The company recently reported its first $100 billion revenue quarter in the third period, driven by the expansion of its cloud unit, which includes its sophisticated artificial intelligence services. Alphabet’s cloud division boasts a substantial $155 billion backlog and a cutting-edge line of chips, giving it a competitive edge in the rapidly evolving AI landscape.

Despite this momentum, Alphabet’s valuation lags behind many of its AI-focused megacap peers. Currently, the stock trades at approximately 26 times next year’s earnings, while competitors like Microsoft, Broadcom, and Nvidia command higher multiples at 32, 51, and 42 respectively, according to FactSet data. This suggests that Berkshire sees untapped value in Alphabet’s long-term growth potential and market dominance.

The Google founders’ deep respect for Buffett extended beyond investment opportunities, shaping the very structure of the company. In the IPO prospectus, Page and Brin directly referenced Buffett’s philosophy when discussing the company’s approach to quarterly results.

“In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations,” they wrote, echoing Buffett’s sentiment: “‘We won’t “smooth” quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.'”

This emphasis on long-term vision also influenced their decision to implement a dual-class stock structure, granting the founders significant voting control. They cited Berkshire Hathaway, along with media giants like The New York Times, The Washington Post, and Dow Jones, as successful examples of companies that leveraged this structure to protect their core values and strategic direction.

“Media observers have pointed out that dual class ownership has allowed these companies to concentrate on their core, long term interest in serious news coverage, despite fluctuations in quarterly results,” Page and Brin explained. “Berkshire Hathaway has implemented a dual class structure for similar reasons.” The decision highlights the lasting impact of Warren Buffett’s business principles on one of the world’s most influential technology companies.

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