Nvidia (NVDA +0.87%) epitomizes the promise of AI. Shares of the chipmaker have skyrocketed more than 170% so far this year. Why? AI is driving huge demand for the company's graphics processing units (GPUs).
Many investors are wondering whether or not it's too late to jump on the Nvidia bandwagon. The most famous investor of all, Warren Buffett, almost certainly isn't one of them. Here's why Buffett wouldn't touch Nvidia stock with a 10-foot pole.
NASDAQ: NVDA
Key Data Points
Crossing reasons off the list
We can cross a couple of reasons off the list as to why Buffett would avoid Nvidia. For one thing, it's not because the legendary investor prefers to stay away from tech stocks.
Sure, Buffett has said in the past that he only invests in what he understands. As a result, he passed up early opportunities to buy tech stocks that went on to become huge winners.
However, tech giant Apple ranks as the biggest holding by far in Berkshire Hathaway's (BRK.A +0.01%) (BRK.B 0.24%) portfolio. Berkshire also owns several other tech stocks right now, including HP and Snowflake.
Buffett also isn't running away from anything related to AI. Yes, he expressed some concerns about AI during Berkshire's annual shareholder meeting in May. Buffett stated, "When something can do all kinds of things, I get a little bit worried because I know we won't be able to un-invent it." His longtime business partner Charlie Munger also said, "I'm personally skeptical of some of the hype that has gone into artificial intelligence."
Again, though, Berkshire's portfolio features Apple and Amazon, both of which have invested heavily in AI development. Several of the companies in which Buffett owns stakes are also leaders in using AI, including American Express, Mastercard, and Visa.
Buffett's top consideration
So why wouldn't Buffett want to buy shares of Nvidia? It comes down to his top consideration in buying any stock. In his 2013 letter to Berkshire Hathaway shareholders, Buffett wrote that he only buys stocks that sell at "a reasonable price" relative to his estimated earnings for at least five years in the future.
I seriously doubt that Buffett would feel comfortable estimating what Nvidia's earnings will be over the next five-plus years. He noted in that 2013 letter to Berkshire shareholders that if he and Munger can't estimate future earnings, which he added happens frequently, they "simply move on to other prospects."
Many investors are questioning Nvidia's valuation these days. The stock trades at over 35 times sales and 84 times forward earnings.
Even those who defend Nvidia's valuation underscore why Buffett wouldn't buy the stock. For example, CNBC's Jim Cramer tweeted recently:
I know there are people who are deriding the valuation of Nvidia. But the valuation is more of an art than many would like. If Nvidia is right then every major company, save Apple, is dependent on it. Every one. What is that worth? The subject is daunting. Humbling
-- Jim Cramer (@jimcramer) May 29, 2023
Buffett would likely agree with Cramer that valuing Nvidia is "more of an art than many would like." It's almost certainly more of an art than he'd like. Buffett also wouldn't want to depend on Nvidia's management being right about the future demand for its chips.
Be like Buffett?
Should other investors avoid Nvidia because Buffett is doing so? No. Each person's investing goals and risk tolerance is different.
Buffett missed out on much of Apple's big gains following the introduction of the iPhone. He expressed regret for not buying Amazon sooner. But plenty of investors bought both stocks well before Buffett did and achieved tremendous gains by doing so.
However, it's a good idea to follow Buffett's lead by evaluating the future earnings prospects and valuation of any stock you buy. That could lead some to invest in Nvidia. Others, though, will be like Buffett -- and not want to touch the high-flying AI stock with a 10-foot pole.
