Key Points
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Since becoming CEO at the beginning of the year, Greg Abel has sold a number of Berkshire’s smaller positions.
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He also turned one existing position into a top five holding in the portfolio, pouring tens of billions into the stock.
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That stock has struggled lately.
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In Greg Abel’s 10 months as CEO of Berkshire Hathaway, arguably his most notable move has been loading up on Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) stock.
While former Berkshire CEO Warren Buffett acknowledged that he initiated the position last year, Abel has purchased tens of billions worth of stock this year and built it into a top five position, with Alphabet consuming 8.2% of Berkshire’s massive roughly $364 billion portfolio.
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While it has generated strong gains for shareholders in recent years, Alphabet stock just experienced its worst single-day decline in history.
What set the market ablaze with fear?
Following the release of its third-quarter results, Alphabet’s shares fell roughly 12.3% on Oct. 29, marking the stock’s worst single-day performance ever.
It was a double miss for Alphabet, as the company reported adjusted earnings per share of $2.67, well below the $3.02 expected by Wall Street analysts. Revenue of nearly $127.6 billion missed consensus estimates of $128.2 billion.
Revenue was still up 25% year over year, while cloud revenue more than doubled, showing that artificial intelligence adoption is benefiting certain parts of the business.
However, free cash flow deteriorated worse than the Street expected. Negative free cash flow came in at over $9 billion, while analysts had modeled negative $2.7 billion.
But the real concerns stemmed from how AI may be cutting into one of Alphabet’s largest businesses that has made the company what it is today. Google services revenue, which includes Search, YouTube advertising, subscriptions, and more, came in at $96.3 billion, more than $2 billion below analysts’ forecasts.
Search revenue also appears to be slowing, with year-over-year growth of 12% in the quarter, down from 19% in the first quarter and 17% in the second quarter.
While several factors impacted search revenue, such as foreign exchange fluctuations, Alphabet’s chief business officer, Philipp Schindler, also noted that “that the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode.”
This has investors spooked about the overall ramifications for search from AI, as search is the company’s largest revenue line item and Google previously controlled a 90% market share in the traditional search market.
According to MarketWatch, J.P. Morgan analyst Doug Anmuth said the “results and the stock’s sharp move lower show us the margin for error when a hyperscaler spending hundreds of billions on the AI infrastructure build-out and flipping to negative [free cash flow] posts disappointing results in the core.”
Although Alphabet remains a leader in AI and its models are considered among the best, the space is highly competitive, and Alphabet likely won’t be able to dominate the large language model (LLM) realm as it did with search.
BNP Paribas analyst Nick Jones wrote in a research note that investors are also worried that AI agents could cut into Google’s advertising revenue if the agents are doing browsing and online shopping instead of people.
I also believe it’s concerning that queries in AI Mode are more difficult to monetize.
Are Buffett and Abel wrong?
The rough day may make investors wonder if Abel and Buffett were wrong about Alphabet. After all, while Buffett will likely go down in history as the greatest investor ever, even the Oracle of Omaha makes mistakes.
Still, one concerning quarter is not enough to make a call, as nobody can say for certain what will happen. Alphabet still owns many strong, fast-growing businesses, including Google Cloud, YouTube, and Waymo.
Furthermore, Alphabet’s Gemini models still hold significant market share, so they should continue to benefit from AI adoption.
But on days like Oct. 29, it’s important for all investors, even the greats at Berkshire Hathaway, to step back and consider the scenarios that could play out with AI. If it does make traditional search irrelevant, where does that leave Alphabet? Or what if AI is simply difficult to monetize?
There are no easy answers, but AI is moving fast, so you can’t sit around and hope things simply work out for the best.
Should you buy stock in Alphabet right now?
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Berkshire Hathaway. The Motley Fool has a disclosure policy.
