Search No Further than Alphabet (formerly Google) for Your AI Exposure

Alphabet (formerly known as Google) announced its plans Monday evening to raise cash by selling $80 billion in stock. We were surprised by the news, especially for a company that generates $165 billion in cash flow each year. Furthermore, they’ve only tapped the equity market twice before — once when it went public in 2004 and then again in 2005.

Of interest, too, was that Berkshire Hathaway will participate in this capital raise by privately purchasing $10 billion of the stock. Earlier this year, 95-year-old Warren Buffett stepped down as its CEO, making this his successor Greg Abel’s first major deal as the company’s new leader.

Historically, companies that partner with Berkshire Hathaway on stock issuances get a major reputational boost from Berkshire’s track record as a savvy investor. While the stock fell 4% on Tuesday, it recovered half of that loss by the end of the week.

It wouldn’t surprise us to see Berkshire count Alphabet as its largest holding one day. It already owns $20 billion of stock, and by purchasing another $10 billion, Alphabet will become Berkshire’s third or fourth largest investment holding when the trade settles. (Disclosure: Clients, Jeff Pollock, and Sunni Schneider have a financial interest in Alphabet as shareholders but did not receive compensation for this content.)

We expect Berkshire to continue adding to their position because of Alphabet’s aggressive investment in AI. This is one reason Alphabet is raising $80 billion, not to mention the $60 billion it has raised by issuing corporate bonds since November.

Heading into the last quarter, Alphabet told its investors that it planned to invest between $175-185 billion this year, mostly on AI. During the most recent quarterly conference call, management upped that guidance by $5 billion, saying it would invest $180-190 billion this year.

Alphabet has been heavily investing in AI for years, and users like their applications. The company’s Gemini app has surged past 750 million monthly active users, while AI Overviews now serve over 2 billion users through Google Search, rapidly eating into OpenAI’s market share.

Right now, despite these large numbers, there isn’t much of a financial return to show for its investment. However, we expect the return to be gigantic and worth the expense. OpenAI’s Sam Altman said earlier this week that he expects companies investing in AI to start seeing that very return in 1-2 years.

AI will be as revolutionary as the Internet. Because Alphabet aspires to be the leader in the space, we believe that the unconventional equity raise is appropriate given the opportunity ahead. For that reason, we will continue to hold the stock and add it to new client portfolios.

-written by Jeff Pollock