"Why did Berkshire buy in at this time? Will Beijing Zhidemai Technology enter after Alphabet Inc. Class C (GOOGL.US) financing $80 billion on a bold bet on AI?"

Alphabet Inc. Class C's parent company Alphabet (GOOG, GOOGL.US) recently announced a round of financing worth up to $80 billion, aimed at raising funds for AI development, including a $10 billion investment from Berkshire Hathaway (BRK.US) at a price of approximately $350 per share. Investors in Alphabet Inc. Class C reacted negatively to the news of Berkshire Hathaway's investment, causing the stock price to drop significantly on Tuesday. The sell-off by investors following this news was not surprising, as they may view Berkshire as striking a profitable deal at the expense of existing shareholders of Alphabet Inc. Class C. However, when we examine how Alphabet Inc. Class C plans to use this raised capital, we may find that this expenditure is likely worth it. Alphabet Inc. Class C's decision to issue new shares at this time is not surprising. The company is in the midst of a large-scale AI construction phase, and its stock price is not far from its all-time high. It is facing significant investment opportunities, while its stock price is at a high that is rapidly rising, making it a classic time to issue new shares for financing. Therefore, Alphabet Inc. Class C and its shareholders are in a favorable position. This leads to the question: how long can this bullish trend continue? While Alphabet Inc. Class C is undoubtedly a great company and will remain excellent in the coming years, its stock price has reached highs that few investors expected at the beginning of last year. Berkshire believes that Alphabet Inc. Class C is worth investing in, but clearly, they are entering at a discounted price. Based purely on price momentum, the upward trend of Alphabet Inc. Class C may not be sustainable. Looking back at the significant gains of Alphabet Inc. Class C in the past six months, one year, and five years, it may be intuitive to think that a correction is imminent. However, when looking at the fundamentals of Alphabet Inc. Class C, a completely different story emerges. Alphabet Inc. Class C has incredibly strong profitability, with high profit margins and return on capital. For a company of its size, its growth rate is also very high, with earnings growing by 22% in the past 12 months. Despite its outstanding performance, the company's valuation remains relatively low compared to its sector, with a P/E ratio of 29, while the NASDAQ 100 index's P/E ratio is over 30. Therefore, based on historical performance and current value, Alphabet Inc. Class C seems to be a good choice. Like any company, the challenge lies in determining whether Alphabet Inc. Class C's strong performance can continue into the future. Alphabet Inc. Class C is built on a strong and interconnected "ecosystem" of products and services, with a wide moat and several products with billions of users, which has been a major driver of its stock price soaring above $350. However, the current tech world is undergoing many changes, including increased competition in the AI field, which is an area that Alphabet Inc. Class C is heavily investing in. Therefore, given the gains Alphabet Inc. Class C has made and the changes in its industry, the investment logic of Alphabet Inc. Class C also needs to be re-evaluated. Analyst A.J. Button previously gave Alphabet Inc. Class C a "buy" rating on April 30, citing its steady growth alongside significant capital expenditures (CAPEX). The high capital expenditures were the reason for rating it as "buy" rather than "strong buy." Since then, Alphabet Inc. Class C's stock price has declined. The current slightly lower price may present a buying opportunity, but on the other hand, competition in the AI investment space is much fiercer than it was a few years ago. Therefore, we need to be sure that Alphabet Inc. Class C remains the clear and unquestionable choice it was a few years ago. Alphabet Inc. Class C's Equity Financing The first major change that has occurred since A.J. Button last published an analysis of Alphabet Inc. Class C is that the company has issued new shares for the first time in many years. The amount raised in this financing round is a substantial $80 billion, making it worth exploring what Alphabet has gained by diluting its shareholders' equity in exchange for $80 billion. According to Alphabet Inc. Class C's recent press release, the company plans to use this $80 billion for AI computation and infrastructure, which means that data centers, servers, and other semiconductors are essential for running Alphabet Inc. Class C's numerous AI applications. These applications include both AI-powered products (such as search, YouTube, Google Drive) and selling computational power to third-party developers through Google Cloud. It is in this second category of business that things become somewhat complex. Google Cloud is a relatively new part of Alphabet Inc. Class C's business, first achieving profitability in 2023. It operates in a fiercely competitive field, facing significant challenges from competitors such as Amazon.com, Inc.'s AWS and Microsoft Corporation's Azure. This is certainly not like Alphabet Inc. Class C's search business, which has maintained a dominant position. Alphabet Inc. Class C and the other two aforementioned cloud companies compete with each other in selling AI server time to network developers. A significant portion of recent businesses is selling the use of NVIDIA Corporation's chips as a service. The cloud business also includes a software component, such as hosting developer tools that developers can use to fully utilize the servers they rent, and there is some differentiation space in this business. For example, companies can exclusively provide proprietary applications as developer tools on their own cloud. However, this space is definitely competitive, as the three companies among the "Big Seven" are vying for the same business, with smaller participants like Oracle Corporation and several Chinese companies also striving to enter the field. Despite facing competition, Alphabet Inc. Class C's cloud division seems to remain profitable so far. In the most recent quarter, the department's operating profit was $6.5 billion, a 200% increase year over year, which is undoubtedly a positive signal. However, the company has also seen a quarter-over-quarter decrease in free cash flow, with first-quarter free cash flow lower than fourth-quarter free cash flow last year. This is mainly due to significant cash outflows caused by AI construction, with Alphabet Inc. Class C estimating capital expenditures for the full year 2026 to be between $180 billion and $190 billion. The company's revenue remains robust, but its cash flow performance fluctuates significantly, showing year-over-year or quarter-over-quarter declines in recent quarters. These significant cash outflows reflect the competitive nature of the cloud business. Alphabet Inc. Class C's search operating costs are relatively low, requiring minimal expenditures to generate significant advertising revenue, whereas these new AI businesses are actually consuming a lot of cash. Part of the reason is that the competition in this field is very intense: companies are pushing up memory and semiconductor prices. Therefore, Alphabet Inc. Class C is operating in an environment more fiercely competitive than its traditional business, and hopes to stand out. What Berkshire Hathaway might be thinking In conclusion, the current situation appears negative or at least risky for Alphabet Inc. Class C, yet one of the most respected financial companies in the world is buying the stock. We must ask ourselves, given Alphabet Inc. Class C's planned annual AI capital expenditures of several hundred billion dollars, what does Berkshire Hathaway see in it. Today Alphabet Inc. Class C has several favorable factors, including: 1. Its internally designed AI chip, known as the Tensor Processing Unit (TPU). This reduces the company's reliance on NVIDIA Corporation slightly compared to competitors. 2. The company's traditional business remains strong, with Alphabet Inc. Class C search maintaining a stable 90% market share, as revealed in the latest quarterly report. 3. The company has 13 different products, each with over a billion users. 4. Google Play dominates half of the Western market's duopoly for smartphone operating systems. These facts all indicate that Alphabet Inc. Class C has a significant competitive advantage in various verticals. These also bring cross-selling opportunities, which can be seen from the various subscription services the company offers, such as Google One. When discussing whether to invest in Alphabet Inc. Class C stock, Berkshire's fund managers may consider these factors. Furthermore, a company's success in operating its own products and services provides assurance for supporting its cloud computing customers. These supports include developer tools, more sustainable uptime, and more. Over time, Alphabet Inc. Class C's excellent reputation among developers should attract more and more customers to use its cloud computing products. Valuation After considering the above factors, we can make a rough valuation of Alphabet Inc. Class C stock. Alphabet Inc. Class C has enough positive factors to safely assume that its earnings will at least remain at current levels and may grow to some extent in the future. Based on data from Seeking Alpha Quant, Alphabet Inc. Class C's earnings per share over the trailing twelve-month (TTM) period were $13.25. Discounted at a 4.5% yield on the 10-year Treasury bond, this yields a stock price of $294 for Alphabet Inc. Class C. This is significantly lower than today's price. However, considering the company's advantages compared to competitors, Alphabet Inc. Class C is a very strong company. Therefore, it is likely to grow to some extent with the growth of the U.S. economy. Setting a 3% perpetual growth assumption, lower than the long-term GDP growth rate, would raise the target price to $833. Historically, Alphabet Inc. Class C's earnings and FCF growth have been much higher than 3%. Therefore, there are ample reasons to believe that Alphabet Inc. Class C's stock price still has a long way to go. However, A.J. Button does not actually intend to set the target price at $833, as a "perpetual growth" is a difficult metric to predict whether it will occur. But even assuming stable growth over the next 10 years, it is easy to arrive at a target price of $500. So, A.J. Button believes that Alphabet Inc. Class C is still a good choice.