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The Oracle of Omaha is (indirectly) betting big on Wall Street's next-big-thing investment.
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If you've ever wondered why Wall Street professionals and everyday investors pay so much attention to Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett, just take a closer look at his track record since taking the reins in 1965. He's overseen an aggregate gain in Berkshire's Class A shares (BRK.A) of 4,362,780% as of the closing bell on Aug. 3, 2023.
What's great about the Oracle of Omaha is there are no secrets. Between Berkshire Hathaway's annual shareholder meetings and media interviews, he's been more than willing to share what factors he looks for when making investments, such as sustained moats, recurring profits, and trusted management teams.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But what you might not know about the Oracle of Omaha is that he's betting big on Wall Street's next-big-thing investment: artificial intelligence (AI).
AI involves using software and systems to oversee tasks usually performed by humans. The incorporation of machine learning is what allows software and systems to become smarter and evolve over time. It's what gives AI broad utility beyond the tech space and is the catalyst that has PwC forecasting a $15.7 trillion global economic boost from the technology by 2030.
At the moment, more than $177 billion (47.3%) of the $375 billion investment portfolio Warren Buffett oversees at Berkshire Hathaway is invested in just three AI stocks.
The bulk of Warren Buffett's "bet" on the future of AI rests with tech stock Apple (AAPL +0.01%), which is Berkshire Hathaway's largest holding by market value. Although the Oracle of Omaha and his investing lieutenants, Todd Combs and Ted Weschler, have built a mammoth position in Apple for reasons that go well beyond AI, utilizing AI is paramount to the ongoing success of Apple's physical products.
Apple's integration of AI solutions really ramped up in 2011 when it began using Siri on iPhone 4s. Voice-command assistance has been commonplace on all Apple iPhones since 2011, with other smartphone companies following suit.
But Apple's AI usage extends far beyond Siri. You can see machine learning technology being put to use in the way iPhone utilizes autocorrect and word suggestions in text, as well as its ability to identify pets from your photos. Whereas Apple's machine learning solutions could previously only identify people, new photo recognition solutions powered by AI allow your cats and dogs to be recognized from photos.
AI is also paramount to the success of Apple Watch and the recently unveiled virtual/augmented reality Vision Pro headset.
But, as noted, Buffett and his team bought into the Apple growth story for markedly different reasons. Namely, they appreciate the global recognition of the brand, the loyalty of the customer base, and the incredible cash flow generated by the company.
Additionally, Warren Buffett is a huge fan of Apple's otherworldly capital-return program. The company doles out more than $15 billion in dividend payments each year and has repurchased approximately $586 billion worth of its common stock over the past 10 years. Berkshire is becoming a larger stakeholder in Apple without the Oracle of Omaha having to lift a finger.
The second artificial intelligence stock that Warren Buffett and his team are betting big on is e-commerce company Amazon (AMZN +0.01%). The more than 10.5 million shares Berkshire owns of Amazon were worth $1.36 billion as of the closing bell on Aug. 3.
Amazon leans on AI solutions in a variety of ways for its globally dominant online marketplace. For instance, the company's AI-powered recommendation engine analyzes what you view, purchase, and put into your cart to recommend new products.
Likewise, the company has encouraged users to utilize AI-assistant Alexa for voice-enabled purchases. As of the end of 2022, Alexa controlled more than a 28% share of the global smart-speaker market, which was 11 percentage points ahead of the No. 2 player, Alphabet's Google Nest.
But Amazon is incorporating AI solutions into more than just its online marketplace. Cloud infrastructure service segment Amazon Web Services (AWS), which is Amazon's core driver of operating cash flow and operating income, allows businesses to build applications with generative AI, as well as lean on machine learning solutions to improve customer interactions, similar to how Amazon's recommendation engine simplifies shoppers' lives.
Through the first six months of 2023, AWS has generated $43.5 billion in sales (16.6% of Amazon's net sales) and $10.5 billion in operating income. Every other segment for Amazon has collectively managed just $2 billion in operating income through the end of June. With enterprise cloud spending still in its early innings, the growth in AWS has the potential to power Amazon's stock significantly higher.
Image source: Getty Images.
The third AI stock Buffett and his team have piled into is data-warehousing company Snowflake (SNOW +0.20%). The $987 million Berkshire Hathaway held in Snowflake stock as of the closing bell on Aug. 3, coupled with the company's positions in Apple and Amazon, collectively add up to 47% of invested assets.
Snowflake is best known for its cloud infrastructure, which is built atop the most-popular cloud infrastructure services. Whereas sharing data can be a potential headache when stored on competing platforms, Snowflake's layered solutions make data-sharing a seamless operation for its members.
The big news in 2023 is Snowflake's addition of generative AI solutions to the data clouds of its vendors. In May, Snowflake completed its acquisition of Neeva, a company that was powered by generative AI and large language model technology.
In addition to aiding customers in developing generative AI applications, Snowflake has partnered with Nvidia, the graphics processing unit (GPU) designer and retailer seen as the infrastructure backbone of high-compute data centers. This partnership gives Snowflake users access to Nvidia's high-powered GPUs.
While there's little doubt that Snowflake finds itself at the center of a high-growth trend, it's also apparent just how pricey the company's stock is relative to other cloud businesses. Prospective buyers would be paying nearly 15 times sales and 163 times consensus forward-year earnings to own shares of Snowflake today. This is an especially precarious valuation, given Snowflake's full-year sales growth has declined on multiple occasions over the past couple of quarters as businesses pare back their near-term spending.
Considering that all next-big-thing investments take time to mature, investors would probably be wise to take a wait-and-see approach following Snowflake's newly announced generative AI push.