GOOGL is undervalued and a good buy; earnings growth compressed the PE to ~17, DCF shows 22% undervaluation, and a strong balance sheet supports AI spending.

Berkshire Hathaway, they are buying, Warren Buffett specifically is buying, even more Google. Yes, Buffett just added another 45% to his position in the A shares, and he's bumped the C shares up to a 3.2% position in the Berkshire portfolio as well.

So, this is now his fourth largest holding, and the crazy thing is Google has arguably gotten even better value over the past 3 months as well. Back when we covered the first quarter filing, Google was trading around a PE of 30, and Simply Wall Street had it sitting at 20% overvalued from their discounted cash flow.

Well, fast forward to now, two things have happened. One, earnings have absolutely taken off up to 244 billion over the past 12 months, and what that's done is it's pulled the PE ratio all the way down to about 17.

You can see it here on the 5-year chart. It's actually sitting near the bottom of its PE range for the last few years. So, this isn't Google getting cheaper because the stock price has gone down, it's the business getting so much more profitable that the multiple has actually compressed, and that shows up on the valuation side, too.

Simply Wall Street's discounted cash flow model now has Google around 22% undervalued. So, a very big swing from where it was last quarter.

But, to be clear, the business hasn't really changed, right? It hasn't changed all that much in one quarter, and the plan hasn't changed, either.

They are still spending an enormous amount of money. You can see it in the free cash flow numbers, right? Earnings of 244 billion, but free cash flow of only 53 billion. Look at the discrepancy now, it's massive.

And that gap, it's all CapEx. It's going into AI infrastructure, it's going into data centers, it's going into chips, it's going into the hyper scaler arms race, as we call it.

But, this is why I find Google really interesting, because they might just be one of, if not the best positioned company to actually go all in on that AI spend without getting too badly burned by it, even if it goes wrong.

So, they're sitting on 242 billion of cash and short-term investments against just a hundred billion dollars of total debt. So, it's a debt-to-equity ratio of 0.156. It's very low.

It's about as close to a financial fortress balance sheet as you're going to find among the hyperscalers, if not the best.

So, while they pour tens of billions into the AI race literally every single quarter, they've got so much dry powder on the sidelines that, honestly, they can just get away with it.

So, similar conclusion to last quarter, this is Buffett buying a wonderful company at a fair price. And remember, too, that his circle of companies that he can even look at, you know, that will shift the needle at Berkshire, is so very small.

So, that definitely plays a factor in why he's made the investment, as well.