Warren Buffett isn't someone that makes investments based on new technology trends. That doesn't mean he ignores them entirely, though.
When asked about artificial intelligence (AI) at Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) shareholder meeting in May, he paraphrased Albert Einstein's comments about the invention of the atomic bomb: "It can change everything in the world, except how men think and behave."
As such, he has some trepidation about how people and businesses will use AI, saying, "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." Nonetheless, he happens to hold several companies in Berkshire's portfolio that are leading the development and distribution of artificial intelligence.
There's one stock that's arguably his favorite AI stock of all: Apple (AAPL -0.35%). Here's why.
Image source: The Motley Fool.
"A better business than any we own"
If there was any doubt that Apple, which accounts for nearly half of Berkshire's equity portfolio, was Buffett's favorite stock, he made his love for the iPhone maker clear at this year's shareholder meeting. He called the tech giant "a better business than any we own."
That is to say, he'd love to own more of Apple. Berkshire currently owns about 5.9% of Apple's outstanding shares, and Buffett notes its stake is increasing every quarter as Apple's management repurchases its stock. He also said selling some shares in 2020 for tax purposes was actually a mistake. And given the fact that Apple's share price has climbed 47% since the end of 2020, he's probably right.
What makes Apple a better business than any of Berkshire's wholly owned subsidiaries, like GEICO or BNSF Railway? It's the fact that Apple's created a product that's become integral to modern life and that consumers love. "I mean, it's an extraordinary product. We don't have anything like that, that we own 100% of," Buffett said, in reference to the iPhone.
The smartphone is an invention that changed the world. And Apple's position in the smartphone market is incredibly strong despite dozens of competitors. Its market share of global smartphone sales sits in the high teens, but its phones generally remain in use longer than its competitors'. As a result, iPhones account for nearly 30% of all smartphones in use around the world, including over 58% of smartphones in the United States.
Apple's strong brand and its ability to craft a superior user experience have helped it maintain its dominance in the space. And while other companies have tried to emulate Apple's strategy, they've proven mostly unsuccessful so far. It's unlikely Apple's going to lose its competitive advantage anytime soon.
An AI innovator disguised as a consumer goods company
Buffett mostly views Apple as a consumer goods company. While there's a lot of technology behind its products, it sells those products, not the technology, to consumers. But investors can't ignore the fact that Apple is investing heavily in AI, and it stands to benefit from the growing use of the tech.
During Apple's fourth-quarter earnings call in November, CEO Tim Cook said the company's investing quite a bit in generative AI. An October report from Bloomberg puts that number close to $1 billion per year, with a focus on building its own large language model and testing a ChatGPT-style chatbot. And while that's practically chump change for Apple, which has about $160 billion in cash and investments on its balance sheet and generates billions in free cash flow every quarter, that's a huge investment for most companies.
What's more, Apple's making big improvements in its own chip designs. The M3 chips found in its latest Macs are capable of much more advanced AI processing thanks to redesigned GPUs and increased working memory. That makes its high-end MacBook a top choice for AI developers.
Image source: Getty Images.
Likewise, the chips inside the iPhone 15 use the same chip platform as the M3. That leads the way for on-device AI applications. That also means Apple could keep user data securely on the device instead of sending it to a web server, opening the door for more AI use cases involving more sensitive information.
Indeed, Apple's biggest AI developments will take advantage of the very factor that drew Buffett to fall in love with the company in the first place: It has a widespread, growing platform to reach consumers. That should benefit its faster-growing and higher-margin services business for years to come as AI infiltrates our lives, much as the smartphone did in the last decade. Apple will be one of the companies that brings those AI uses to the masses.
It's no wonder that Apple is Buffett's favorite company. And despite the fact that shares are trading near an all-time high, we may be sitting at the start of Apple's next round of growth, fueled by AI.
