Warren Buffett is known for his incredible stock-picking abilities and for outperforming the market for not only years, but decades. But that doesn't mean he hasn't made his share of mistakes over time.
Buffett normally focuses on investing in areas that are in his circle of competence. While financial stocks and businesses involved with consumer goods are staples within the Berkshire Hathaway portfolio, tech stocks aren't nearly as common. And there are three tech stocks he says he's made mistakes on in the past: Amazon (AMZN +1.58%), Alphabet (GOOG +3.56%)(GOOGL +3.68%), and International Business Machines (IBM 2.53%). Here's a closer look at where Buffett went wrong on these stocks, and whether they can be good buys right now.
NASDAQ: AMZN
Key Data Points
1. Amazon
Buffett is a fan of Amazon founder Jeff Bezos but admits that he underestimated the opportunity that the tech company could capitalize on in the future. In an interview with CNBC several years ago, Buffett said he was "too dumb" to see the potential for Amazon, and for the business to become as big as it is today.
By the time it may have been evident, Amazon's valuation likely rose too high for Buffett. While Amazon is hugely profitable today, it took years for it to get to where it is now. It went public in 1997 and didn't post a profit until the last quarter of 2001, when it generated a relatively modest $5 million in earnings.
The company still has exceptional growth opportunities ahead, such as in cloud computing and artificial intelligence (AI). Buffett may have missed the opportunity, but for investors who see the potential in tech, Amazon may not be too expensive to buy today. The stock trades at around 41 times its trailing earnings, which is a much cheaper valuation than it has averaged in prior years.
NASDAQ: GOOG
Key Data Points
2. Alphabet
Another big tech business that Buffett admits he missed the boat on was Alphabet, which previously went by the name of its popular search engine, Google. While Buffett saw the opportunity with Google, he wasn't sure about its competitive advantage. At an annual Berkshire meeting, he talked about his concern that someone else could overtake the big search engine, just as it had done in the past. "The trouble is I saw that Google was skipping past AltaVista, and I then wondered if anybody could skip past Google," he said.
Today, the big question around Alphabet is whether ChatGPT or some other artificial intelligence chatbot will chip away at its market share. And there's also the danger of what happens next for the business after a judge ruled last year that it had a monopoly in search. Investors are now wondering whether a breakup of the company could take place.
Alphabet's trading at a modest 23 times trailing earnings, which is a reasonable valuation given both the risk as well as the opportunities ahead for the business. For long-term investors who are comfortable with the risk, Alphabet can potentially make for a great buy right now.
NYSE: IBM
Key Data Points
3. International Business Machines
International Business Machines (IBM) is the one tech stock on this list that Buffett did actually buy. But it's also a stock he regretted adding to his portfolio. He began buying shares of IBM in 2011, believing that since it helps many companies' IT departments, there would be strong, continued demand for its products and services.
However, growth has been hard to come by for IBM and its top line would end up declining rather than increasing, as Buffett had hoped. The tech company struggled to keep up with new technologies such as cloud computing. Buffett would ultimately sell his entire position in IBM stock by 2018.
For investors, it serves as a reminder as to how quickly things can change in tech It's why it can take extra effort to monitor the sector if you're picking individual stocks, to ensure they are still good buys and that their growth prospects remain strong.
IBM's business still struggles to grow. In 2024, its top line rose by just 1%. Based on analyst estimates, it's trading at more than 23 times its future profits, which seems steep for a business that isn't generating much growth. And that's why IBM is the only stock on this list that may not be a great buy today.
