Warren Buffett, the long-time CEO of Berkshire Hathaway, (NYSE: BRK.A) (NYSE: BRK.B), is known to avoid investing in companies that he doesn't understand and is not one to invest in cutting-edge technology. You can't fault the strategy when you consider Buffett's extraordinary career, which is coming to a close this year.

But that doesn't mean individual investors can't apply Buffett's investing principles to various AI companies to identify stocks that would interest him if he were an AI investor. There's one company that checks all of Buffett's primary boxes when looking for a stock, and it's right under everyone's nose.

Image source: The Motley Fool.

Alphabet looks like a stock Buffett would invest in

Buffett is a value investor at heart, and he likes businesses that generate a ton of cash flow. Brand value is another item that he considers. But perhaps the biggest factor is the price he must pay for a stock. Buffett doesn't like overpaying for businesses and prefers to buy them at a discount to where they should be trading.

One company checks all of these boxes: Alphabet (GOOG -1.48%) (GOOGL -1.62%).

Alphabet's brand value can't be disputed, as its properties like Google, YouTube, and the Android operating system are at the top of their respective industries (Android is much more popular outside of the U.S.). It's also a free-cash-flow-generating machine, turning 21% of revenue into free cash flow over the past 12 months. This number is a bit deflated due to Alphabet's massive investments in building data centers meant for AI and cloud computing. Still, these expenses will eventually drop, which will cause Alphabet's FCF to explode higher.

Lastly is Alphabet's price tag, which is incredibly cheap compared to its peers.

GOOGL PE Ratio data by YCharts

At 19 times trailing earnings and 18 times forward earnings, Alphabet's stock is at some of the cheapest levels it has reached in some time. Alphabet's stock looks quite inexpensive compared to the broader market (as measured by the S&P 500, which trades at 22.4 times forward earnings).

With Alphabet checking those three primary boxes for Buffett, it may be a stock he'd consider buying if he were an AI investor, but there may also be some reasons to stay away.

Alphabet has three primary headwinds

There's a reason that Alphabet's stock has gotten this cheap, and it has to deal with three primary issues:

1. AI challenging search
2. Economic headwinds
3. Government lawsuits

The biggest and most obvious challenge Alphabet faces is to its primary product: Google Search. Google Search is trying to defend its market share from generative AI products, and there are some predictions that a typical Google search will become a thing of the past as generative AI becomes more prevalent. This is far too aggressive of a prediction, as Google already offers AI search overviews, bridging the gap between traditional search and a full AI experience. While Google will undoubtedly lose some users to AI, it's hard to imagine the masses switching overnight.

Next, investors are worried about Alphabet's advertising business during an economic downturn. About three-quarters of Alphabet's revenue comes from ad revenue, so it's a very important market. However, the economic uncertainty caused by tariffs could trigger a downturn or a recession, hurting Alphabet's ad market. While this is possible, economic downturns are not new, and Alphabet weathered multiple downturns throughout its life. It's equipped to handle this, and the ad markets always bounce back stronger than before after a downturn.

Lastly, there are the government issues. Alphabet has been found guilty in two court cases of having an illegal monopoly, one in its search business and another in its advertising platform. We're still years away from knowing the outcome, as multiple appeals will occur to challenge the court's findings. At the end of the day, I think there's a low chance that Alphabet is broken up, mainly due to the AI headwinds it's already facing. There may be some concessions at the end of the day, but Alphabet will likely be intact five years from now.

I don't believe that Alphabet's three primary threats are much to worry about, which is why I think investors should be willing to buy Alphabet while it's on sale. Buffett might be thinking the same thing, and you never know if he wants to make one more splash in the investment world before he retires.