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By Will Ashworth
| May 9, 2017
Roman Boed via Flickr
Warren Buffett admitted over the weekend at the Berkshire Hathaway Inc. (BRK.A, BRK.B) annual meeting that he should have bought Alphabet Inc. (GOOG, GOOGL) stock. That’s because, early on, he and Charlie Munger knew that Berkshire’s insurance subsidiary, Geico, was paying $10-$11 per click to Google for advertising fees.
If Buffett had bought GOOGL stock back in 2011, instead of International Business Machines Corp. (IBM) stock, Berkshire Hathaway shareholders would have something else to celebrate, rather than commiserating in defeat.
Buffett recently sold 24 million shares of IBM (one-third of Berkshire’s position in IBM) in the first and second quarters at prices around $180. Berkshire Hathaway first acquired 57.3 million shares of IBM in the third quarter of 2011. At the end of September 2011, those shares of IBM stock were worth $10 billion, or $174.87 apiece.
As of May 5, 2017, those shares are each worth $155.05, a 19.8% loss over 80 months. Over those same 80 months, GOOGL stock is up 268.6%.
It’s no wonder Buffett laments not buying GOOGL stock.
Prices and data are from the original InvestorPlace story published on May 8, 2017. Click on ticker-symbol links in each slide for current prices and more.
Robert Scobie via Flickr
However, it’s not too late. Buffett bought Apple Inc. (AAPL) long after it moved from a growth stock to value play, and there’s no reason he can’t do the same with GOOGL.
But, should he?
Heck, if you get knocked off the horse, you’ve got to get back on it. Sure, IBM (which was his first tech play) was a disaster, but that doesn’t mean they’ll all be that way. Google stock’s got a lot going for it and still has more room to run than IBM ever did.
InvestorPlace contributor Laura Hoy thinks GOOGL stock will blow past $1,000.
“Google has been able to remain a dominant player in the online advertising space despite strong competition from the likes of Facebook Inc. (FB) and Snap Inc. (SNAP),” Hoy said recently. “Advertising revenue increased in the first quarter, which is a great sign considering that there were some questions about whether a scandal with YouTube advertisements would cause companies to abandon Google.”
In the past, I’ve discussed all the other exciting things that were going on at Alphabet. Probably one of the biggest opportunities is its cloud business, where its annual run rate is likely to be closer to $2 billion — its 2015 annual run rate was estimated to be $1 billion by RBC Capital Markets analyst Mark Mahaney — and growing quickly.
Alphabet CEO Ruth Porat calls GOOGL’s cloud business “one of the fastest-growing businesses across Alphabet,” strong praise from a woman who’s known to run a tight ship and doesn’t get overly dramatic when talking business.
Tariq Shaukat, president of customers at Google Cloud, thinks big things are happening. Diane Greene, Google’s head of cloud, believes the company could pass Amazon.com, Inc. (AMZN) by 2022.
“Within five years we can overtake Amazon in the market, and that is all based on this idea that only 5 percent of workloads are currently in the cloud that could go into the cloud,” Shaukat told CNBC recently. “What happens today is not a terribly good predictor of what is going to happen in the future.”
Warren Buffett should be buying GOOGL stock. And so should you.
In fact, I think Buffett should dump the rest of his IBM stock and invest the proceeds not only in GOOGL, but AMZN, FB and Alibaba Group Holding Ltd (BABA), too.
I call them FAAA, not FANG, and together with Apple are the only five tech stocks Berkshire Hathaway needs to own.
I like AAPL stock for its services business and its cash; Amazon because of its cloud, Prime, and Jeff Bezos; Facebook on account of Mark Zuckerberg’s energy; Alibaba because Jack Ma is almost as bright as Jeff Bezos; and Alphabet and GOOGL stock because it is the internet.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.