For the better part of six decades, Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett has been putting on a show for Wall Street and the investing community. Despite being fallible just like every other investor, the "Oracle of Omaha," as he's affably known, has overseen a monstrous aggregate gain in his company's Class A shares (BRK.A) of 4,995,105%, as of the closing bell on March 15.
Extensive books have been written detailing the "recipe" Buffett has used to vastly outperform the benchmark S&P 500. Typically, this means seeking out brand-name businesses with sustainable competitive advantages and trusted management teams.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
But you might be surprised to learn that three of the 45 stocks Buffett and his investment team are currently holding in Berkshire Hathaway's $366 billion portfolio are cutting-edge artificial intelligence (AI) stocks. According to estimates from PwC, AI solutions -- i.e., software and systems handling tasks that would normally be assigned to humans -- can add $15.7 trillion to global gross domestic product by the end of the decade.
As of March 15, 44% ($159 billion) of the $366 billion portfolio Buffett oversees at Berkshire Hathaway was being put to work in three widely owned AI stocks -- and no, Nvidia isn't one of them.
Apple: $156,317,767,200 (42.8% of invested assets)
The lion's share of Buffett's "AI holdings" can be traced to the largest position in Berkshire's investment portfolio: tech stock Apple (AAPL -0.35%). Apple accounts for more than 4 times the weighting of Bank America, which is Berkshire's second-largest holding (10% of invested assets).
Although Apple isn't developing the infrastructure that's made Nvidia the foundation of the AI movement, AI solutions are embedded in virtually all of its products and are critical to the company's long-term growth strategy. Apple uses AI to improve the autocorrect and word suggestion capabilities of its U.S. market-share-leading iPhone, and recently launched its mixed-reality Vision Pro headset, which incorporates eye- and hand-tracking using AI.
While artificial intelligence solutions are staples in Apple's products, Buffett and his top investment aides, Ted Weschler and Todd Combs, undoubtedly purchased shares of Apple for different reasons.
One of the primary lures of Apple is its exceptional customer loyalty. It's one of the most well-known and valuable global brands. Sustaining a 50% or greater share of the U.S. smartphone market means consumers eagerly await the annual launch of a new iPhone.
The Oracle of Omaha is likely also enamored with Apple's top-notch management team. In addition to constantly improving the functionality of iPhone and developing the Apple Watch, Apple CEO Tim Cook is spearheading a transformation that's seen his company become more services oriented. Emphasizing subscription services should steadily improve Apple's margins, smooth out the sales fluctuations observed during the tail end of major iPhone upgrade cycles, and encourage consumers to stay within Apple's ecosystem of products and services.
The other reason Buffett is a big fan of Apple is the company's unmatched capital-return program. Apple returned just a hair over $15 billion in dividends to its shareholders last year, and has repurchased a jaw-dropping $651 billion worth of its common stock since the start of 2013. This means Berkshire is steadily becoming a larger stakeholder in Apple without having to lift a finger.
Amazon: $1,744,200,000 (0.5% of invested assets)
A second artificial intelligence stock you'll find nestled in Warren Buffett's $366 billion portfolio at Berkshire Hathaway is none other than e-commerce kingpin Amazon (AMZN 3.43%).
Amazon is utilizing AI in more ways than can be counted here. Some examples include analyzing what you're purchasing and putting in your shopping cart to recommend new products, as well as allowing its Amazon Web Services (AWS) customers to build applications using generative AI to tailor advertisements and improve customer interactions.
Additionally, Amazon is developing its own graphics processing units (GPUs) for its in-house data centers that could complement, or even replace, the GPUs from Nvidia that have taken the AI movement by storm.
While most people are familiar with Amazon because of its overwhelmingly dominant online marketplace, it's actually the company's ancillary operating segments that do a majority of the heavy lifting. Arguably no segment is more important than AWS.
Last year, AWS accounted for about a sixth of Amazon's net sales, but was responsible for two-thirds of the company's operating income. Enterprise cloud spending still appears to be in its relatively early innings of expansion, which suggests AWS has many years of double-digit sales growth ahead. As of September 2023, AWS led all other cloud infrastructure service platforms with a 31% share of global spend.
Interestingly enough, Amazon is fairly inexpensive, too. Shares can be scooped up right now for a greater than 40% discount to its average multiple to cash flow over the trailing-five-year period. While this may not be the traditional "value stock" Buffett looks for, it's certainly something that has piqued the interest of one or both of his top investment aides.
Images source: Getty Images.
Snowflake: $961,500,271 (0.3% of invested assets)
The third AI stock that, collectively with Apple and Amazon, accounts for approximately 44% of Berkshire Hathaway's invested assets is cloud data-warehousing company Snowflake (SNOW 3.69%). This is another Berkshire holding that was almost certainly added because of the influence of Weschler or Combs.
Snowflake really put itself on the map of AI investors this past summer when it announced a collaboration with Nvidia that would allow Snowflake accounts to utilize Nvidia's high-powered GPUs. Snowflake is also making generative AI solutions available to its customers to assist with training, customizing, and deploying large language models.
What's really drawn investors to Snowflake since it went public in September 2020 is its well defined competitive advantages. For instance, it can be challenging for users of competing cloud infrastructure service platforms to share information. Since Snowflake built its infrastructure atop the most popular cloud platforms, sharing and transferring data is seamless.
Customers also seem to appreciate Snowflake's transparent pricing policy. Instead of utilizing subscription pricing like many of its peers, Snowflake has opted to charge users based on how much data they store and how many Snowflake Compute Credits they use.
But in spite of these well-defined competitive edges, justifying Snowflake's premium valuation has been challenging. Its days of triple-digit sales growth are long gone. With businesses still cautious about the near-term outlook for the U.S. economy, Snowflake's annual sales growth is expected to slow to approximately 22% in the current fiscal year. At north of 160 times estimated earnings per share, investors might be wise to keep their distance and allow Snowflake to grow into its current valuation.
