Warren Buffett, the Oracle of Omaha, is known for his value investing strategy and long-term approach to stock picking. While Buffett himself hasn’t publicly expressed interest in buying Google (now Alphabet Inc.), our quantitative model based on his investment philosophy suggests that the tech giant might be a perfect fit for his portfolio. Let’s dive into why Google (GOOGL) could be an attractive investment according to Buffett’s criteria.
The Buffett Approach: Seeking Durable Competitive Advantage
Buffett’s investment strategy revolves around finding companies with a “durable competitive advantage.” These are businesses that have a strong moat, protecting them from competition and allowing them to maintain high profitability over extended periods.
Google, with its dominant position in search, digital advertising, and various other tech sectors, certainly fits the bill of a company with a wide moat. Its brand recognition, network effects, and continuous innovation in areas like artificial intelligence give it a significant edge over competitors.
Consistent Earnings Growth
One of Buffett’s key criteria is consistent and predictable earnings growth. Our model, based on Validea’s interpretation of Buffett’s strategy, looks at this closely.
The analysis shows that Google’s earnings per share have grown from $0.99 to $5.97 over the past decade, with only one minor decline two years ago. This consistent growth pattern aligns well with Buffett’s preference for predictable earnings.
Strong Return on Equity (ROE)
Buffett favors companies with a consistently high return on equity, ideally above 15%.
Google passes this criterion with flying colors. Its average ROE over the last ten years is 18.5%, and it has maintained a ROE above 10% for each of the past ten years. The three-year average ROE of 26.4% is particularly impressive.
Conservatively Financed
Buffett prefers companies with low debt levels relative to their earnings.
The analysis reveals that Google could pay off its entire debt of $13,238 million with less than two years of earnings, which stands at $87,031.7 million. This conservative financial structure would likely appeal to Buffett.
Efficient Use of Retained Earnings
Buffett looks at how well management uses retained earnings to generate shareholder value.
The model indicates that Google’s management has delivered a 17.2% return on retained earnings over the past decade, which is considered excellent and would meet Buffett’s standards.
Attractive Valuation
While Buffett focuses on quality first, he won’t overpay for even the best businesses.
The analysis suggests that based on various methods of calculating future value, investors could expect an annual return between 13.4% and 20.5% on Google stock over the next decade. The average expected return of 16.9% would be highly attractive to Buffett.
A Buffett-Worthy Investment?
According to our quantitative model based on Warren Buffett’s investment criteria, Google (Alphabet Inc.) appears to be an excellent candidate for his portfolio. It demonstrates a durable competitive advantage, consistent earnings growth, high returns on equity, conservative financing, efficient use of capital, and an attractive valuation.
While it’s important to note that this analysis is based on a model interpretation of Buffett’s strategy and not the man himself, the strong alignment with his known preferences suggests that Google could be a stock worthy of the Oracle’s consideration.
Further Research
