Sometimes it's better to be lucky than good. But the true greats like Warren Buffett are both. His holding company Berkshire Hathaway (BRK.A -0.90%) (BRK.B -0.86%) began buying shares of iPhone maker Apple (AAPL -0.72%) in 2016. That investment has grown into the holding company's most significant position through sheer outperformance.
That's a heck of a stock pick.
Buffett didn't realize it then, but fast-forward seven years and artificial intelligence (AI) is revolutionizing the economy as we speak. And as luck would have it, Berkshire's largest position, a whopping $155 billion stake in Apple, has Berkshire positioned to benefit from all that AI has to offer.
Here is what you need to know.
AI clues in Apple's products
Apple has built an empire as a consumer electronics brand. It sells smartphones, computers, earbuds, and other accessories, followed by a variety of subscription services to help keep consumers locked into its ecosystem. From digital wallets to music, news, exercise, and gaming, there is a service for just about every digital need -- all accessible through your favorite Apple device.
Today there are an estimated 1.5 billion active iPhone users alone, a massive user base that allows Apple to launch a new service and rapidly grow it. For example, Apple launched a buy now, pay later service, and with a simple iOS update, it can peddle it to as many users as it wants.
This ecosystem is Apple's competitive advantage, and protecting it is the company's secret to long-term prosperity. Apple hasn't made waves in AI like some other big tech companies, but it's undoubtedly creeping into Apple's user services. Here are some examples:
- Photo editing features such as removing objects/backgrounds
- Predictive text on the keyboard
- Face ID with masks
- Crash detection in automobiles
These changes all contribute to a better user experience, making it more likely you will continue upgrading your devices to the next generation. The system made Apple one of the decade's best investments.
Could Siri become a game-changer?
Much of the recent attention on AI centers around ChatGPT and other large language models, or chatbots, which can source information and reply to queries with conversation-like replies. Ironically, Apple had already broached this with its voice assistant Siri in 2011. The software has evolved, but most iPhone users are probably familiar with its limited capabilities.
But integrating ChatGPT-like intelligence into Siri would be a potential game-changer, helping the voice assistant realize the potential that users have been waiting over a decade for. It was recently reported that Apple's engineers are actively looking at technologies like what powers ChatGPT. Though nothing is announced or imminent, it's an exciting possibility worth keeping an eye on.
Should investors follow Warren's lead?
Fortunately, you don't need AI to justify owning Apple stock -- the company's dominant ecosystem is plenty. However, there are some things you should consider before buying shares today.
For example, Warren Buffett bought the stock for Berkshire in early 2016 when shares traded near a price-to-earnings ratio (P/E) of just 10. It turned out to be the cheapest valuation Apple would trade at ever since. Today shares trade at a P/E of nearly 30, which complicates things.
Analysts believe Apple's earnings-per-share (EPS) growth will hover around 10% annually, making it harder to pull the trigger when the S&P 500, which historically averages 10% annual returns, trades at a much lower valuation.
AAPL PE Ratio data by YCharts
Investors might benefit from waiting for shares to cool off after appreciating 30% since the start of the year. Many economists believe the U.S. is entering a recession, and the potential market turbulence might create a better buying opportunity. Be sure to keep Apple on your watchlist, though; the future is still bright for Buffett's (and Berkshire's) biggest holding.
