Warren Buffett closed out his latest letter to Berkshire Hathaway (BRK.A +2.73%) (BRK.B +2.53%) with several quotes from his longtime business partner Charlie Munger. At the end of those quotes, he added some advice: "Find a very smart high-grade partner -- preferably slightly older than you -- and then listen very carefully to what he says."
Investors could even consider skipping the part of that recommendation about finding a smart partner and instead just listen carefully to Munger himself. Even at age 99, he frequently shares his views on a wide range of topics.
Last week, Munger spoke at Zoom Video Communications' Zoomtopia conference in San Jose, California. He stated at the conference that he thinks artificial intelligence (AI) is overhyped. Is Munger right?
Munger is an AI skeptic
Munger was asked point-blank at the Zoomtopia conference to give his opinion on AI. The never-bashful nonagenarian replied, "I think it's getting a huge amount of hype. And I think it's probably getting more than it deserves."
The Berkshire Hathaway vice chairman noted that AI isn't new. He said, "We've always had artificial intelligence, where software creates more software. And, of course, that's very useful, [but] we've had it for a long time."
This wasn't Munger's first time publicly expressing similar views. He told CNBC in February 2023 that there was "a lot of crazy hype" around AI. He added, "Artificial intelligence is not going to cure cancer."
At Berkshire Hathaway's annual shareholder meeting held in May 2023, Munger echoed those earlier opinions. He stated: "I'm personally skeptical of some of the hype that has gone into artificial intelligence. I think old-fashioned intelligence works pretty well."
Examples that could support Munger's view
We don't have to look very far to find examples that could support Munger's view about AI. As a case in point, check out C3.ai (AI +1.02%). The company markets an enterprise AI application development platform. In 2016, C3.ai wasn't C3.ai. Its name then was C3 IoT, emphasizing a focus on the Internet of Things (IoT). Before that, the company was named C3 Energy, reflecting its software that helped businesses reduce their carbon footprints.
With the surging interest in AI this year, C3.ai's stock price has soared close to 120%. It was up more than 300% at one point in the summer.
NYSE: AI
Key Data Points
You might think that C3.ai's business is absolutely booming with that kind of stock performance. However, in its latest quarter, the company reported year-over-year revenue growth of under 11%, with a net loss of more than $63 million. Those aren't the kind of numbers that seem to justify the gains C3.ai stock has delivered so far in 2023.
Some, notably including NYU professor and valuation expert Aswath Damodaran, might add Nvidia (NVDA +0.10%) to the list as well. The chipmaker's shares have more than tripled in value year to date. Nvidia's stock now trades at nearly 35 times trailing 12-month sales.
In June, Damodaran tweeted that Nvidia's fair value was around $240 per share. It now trades at more than twice that level.
NASDAQ: NVDA
Key Data Points
However, Nvidia is at least delivering impressive revenue and profit growth. The company reported year-over-year revenue growth of 101% in the second quarter of 2023, with adjusted earnings per share vaulting 429% higher. The demand for its graphics processing units (GPUs) fueled by interest in generative AI remains strong.
Is Munger right about AI?
I think that Munger is both right and wrong in his views about AI. Yes, there has been more hype than warranted about some companies and stocks with AI ties. Technology researcher and consultant Gartner's hype cycle includes five phases:
- Innovation trigger: This is when a technological breakthrough receives intense initial publicity.
- Peak of inflated expectations: Several companies achieve significant success, causing investors to raise expectations to very high levels.
- Trough of disillusionment: Investors are discouraged when companies don't live up to the initial hype.
- Slope of enlightenment: The technological breakthrough begins to produce the kinds of results that were hoped for earlier.
- Plateau of productivity: The breakthrough is adopted into the mainstream.
We could be in the second phase with inflated expectations. If so, the "trough of disillusionment" just might be right around the corner.
However, I think Munger is wrong in his skepticism of AI in general. My view is that AI truly is a game-changing technology that could be even bigger than the internet in terms of its long-term impact. And while Munger is correct that AI has been around for decades, we really are seeing some astounding breakthroughs that far surpass what has been achieved in the past.
Buffett's last Munger quote in his letter to Berkshire shareholders was something that his partner has said to him for decades: "Warren, think more about it. You're smart, and I'm right." Maybe Munger will be proven to be completely right about AI. I suspect, though, that this might be one of the rare cases where he won't be.
