It might surprise investors that 47% of Warren Buffett's Berkshire Hathaway portfolio is in one stock. For an investment manager who preaches the virtues of diversification, this decision seems counterintuitive, to say the least, especially when one can easily assume that an artificial intelligence (AI) stock would imply higher risks.
However, it might also relieve some investors to know that the stock is Apple (AAPL 0.02%), the largest publicly traded company by market cap. Here's why Buffett's team seems to stick with this tech giant and why it will likely remain a Berkshire Hathaway mainstay for some time to come.
AI, Apple, and Berkshire Hathaway
Admittedly, Buffett's team has not appeared to target AI stocks directly but rather focuses on solid companies that also happen to utilize AI. Other so-called "Buffett AI stocks," such as Amazon and Snowflake, combined comprise less than 1% of Berkshire's portfolio. Also, while Buffett belatedly embraced technology stocks long ago, Apple is his company's only tech position valued at over $10 billion.
Nonetheless, Apple has become a significant investor in AI. Virtually all of its latest products and services apply AI on some level. The company has also long funded doctorial fellowships through its Apple Scholars program, which makes it a major force on the research front.
Moreover, its push into AI could indirectly influence Buffett's team to hold the stock. AI controls one of the primary smartphone operating systems. To this end, AI can help improve the user experience, for instance, by powering the Siri neural network and Face ID. Also, since Apple designs its chips, it has numerous options to integrate AI into its products in ways we do not know.
Apple's financials and AI
Investors should also focus on the virtuous cycle fostered by Apple and its AI. The company's current liquidity stands at about $162 billion after factoring in unrealized losses on short-term investments. This gives the company tremendous optionality when funding AI research and initiatives and can help Apple buy the technology it cannot successfully produce. Its products and related services helped it generate a net income of $97 billion in fiscal 2023 (ended Sept. 30).
Although net income suffered a 3% yearly decline in a sluggish consumer economy, the company generated nearly $100 billion in free cash flow during the fiscal year. Much of this money will likely find its way back into AI research, improving its products and bolstering the company's net income and free cash flow.
The virtuous cycle also helped translate into gains for shareholders, as Apple stock rose by just over 50% in 2023. That took its price-to-earnings (P/E) ratio to around 32, a level close to multiyear highs. Nonetheless, it maintains a lower valuation than Amazon, Microsoft, and Nvidia and one just slightly higher than Google-parent Alphabet, indicating the market has fairly valued the company.
Berkshire's Apple investment
Investors should consider Apple an AI stock, but it is likely not a direct reason for Berkshire Hathaway to hold such a massive position in the company. Indeed, its research in AI and its AI-driven applications make Apple a leader in the field. And as AI has become essential to investors, the company has more explicitly linked AI to product functionality.
However, the popularity of its products and the company's financials are the likely reasons for Berkshire to place this unprecedented level of trust in Apple. To this end, investors should expect Berkshire's focus to remain on Apple's financials and not on its AI directly.
