GOOG is the new AAPL

In a recent interview, Buffett admitted that Berkshire’s recent investment into GOOG was actually his decision, not Greg’s. That threw off a bunch of value investors — wasn’t this the guy who famously didn’t invest in Tech because it was too hard to understand? And why didn’t Buffett invest in Google earlier? More importantly, why now?

My initial thought was that Buffett had “given up” or “settled” for what he is perhaps best known for — finding something where he can invest practically unlimited sums of capital (which Berkshire throws off) into something which ekes out a satisfactory 10% ROE for a long period of time. That would certainly fall within the modus operandi of how he has invested in the recent past — think BNSF, Precision Castparts, Pilot J, Kraft Heinz and Occidental. In other words, not something necessarily market-beating, and more something which is specifically attuned to the needs of Berkshire — finding an adequate yield on large sums of cash.

I didn’t think too much of it until recently, when I was taking another look at Buffett’s investment in Apple again. Somehow this fired off some neurons within my brain and made me connect two and two together.

Allow me to repeat what I had said here. Buffett famously invested in Apple at around 16x PE. That’s an initial earnings yield of 6.25% right off the bat. Since then, AAPL has gone on to increase its EPS from around $2.16 per share to $8.71 per share, a 4x increase. This means his initial earnings yield of 6.25% has increased to 25% in 10 years! And it will continue to increase going forward.

So how does this compare to GOOG? Well, Google is in the fortunate position to be growing its earnings (or at least EPS) by around 20% per annum. Going by his 13-F’s, Buffett’s investment in GOOG would likely have been made around 25x PE normalized. If we do the math, this means Google will likely be able to increase its earnings yield from 4% to 25% over the next 10 years (1/25 x 1.20^10). That’s another AAPL over there!

Okay, so what does Buffett see in Google’s heavy investments in AI? If you think about it, it’s unlikely that Buffett is investing in GOOG because of AI, and far more likely that he cares first and foremost about their business in Search. Buffett is not known for dabbling into shiny new toys, and is instead well known for investing in businesses with great moats. It’s just far more likely that he is investing into Google for its legacy Search business over anything involving AI, which falls into the “too hard Tech” pile.

But what about the ROI of AI, or rather the potential lack of it? Will it detract from the overall gains from the Search business over time? That actually doesn’t matter, as Google’s investments in AI are not so different from Apple’s investments in share buybacks. It’s still a cash outlay, which rather than being returned to shareholders is instead being channeled into incremental assets through retained earnings. And the return on investment will still be apparent, through Google’s future ROA/ROIC and subsequently its revenues/EPS.

If I put on my Buffett hat, here is how I’d think about Google. It’s got a great Search business, and it’s venturing into a new AI business. Sure, AI might do great, but I’m more concerned about how it will augment the Search business. In that vein, AI is simply ancillary to Search and will potentially boost Search; but it’s not my main focus. I’m investing in Google for the Search business, and the AI business is just a nice bonus to have.

Furthermore, the Search business has such nice moats. It will likely persist until the end of time, and is something Buffett can put his money into for eons. This is something Buffett is already well known for, and it fits his investing profile to a T.

So is Google the next Apple for Berkshire? I certainly can see it! Can you?