Warren Buffett has proven his ability to deliver market-beating gains, and thanks to this, build wealth over the years. The billionaire investor, at the helm of Berkshire Hathaway, posted a 19.9% compounded annual increase over nearly 60 years -- and that's as the S&P 500 index recorded a 10.4% such gain. All of this helped his portfolio reach $258 billion as of the closing of the most recent quarter.
Though Buffett's biggest holding is Apple, the billionaire generally doesn't invest in technology stocks, so you might not think of turning to this top investor for inspiration when shopping for artificial intelligence (AI) players. But here's some good news: We actually can use some of Buffett's investing principles to identify smart buys in any industry.
Here, I'll consider two elements that consistently drive Buffett's investment decisions, and these are valuation and competitive advantage. He aims to get in on stocks at a cheap or reasonable level, and he favors stocks that have what it takes to stay ahead of rivals over time. Let's check out two Buffett-style AI stocks that are winning in both of these areas -- and could build long-term wealth.
Image source: The Motley Fool.
1. Alphabet
Alphabet (GOOG 2.45%) (GOOGL 2.30%) is a company that you probably have some interaction with on a daily basis. The company owns Google Search, the world's most popular search engine with about 90% market share -- and this business has driven Alphabet's revenue and net income into the billions of dollars. This is the result of advertisers paying to promote their products and services across the Google platform in order to reach us.
This search business has a solid moat, or competitive advantage, thanks to its performance and position as part of our daily routine -- when we don't know something, we don't just search for it, we "Google it." So, as long as Google Search continues to offer us the performance we expect, it's likely to maintain its leadership.
And here's how Alphabet is ensuring that happens: The company has invested heavily in AI, even developing its own large language model (LLM), Gemini, to improve and expand the capabilities of Google Search. This should please users, and as a result, keep advertisers coming back and potentially even spending more.
NASDAQ: GOOGL
Key Data Points
On top of this, the AI investment is helping Alphabet's Google Cloud business deliver double-digit revenue gains quarter after quarter. Google Cloud sells various AI products and services to customers, and demand is high as the AI boom continues.
Along with this solid competitive advantage, Alphabet offers a valuation that might even please the bargain-hunting Buffett. Alphabet, trading for 18x forward earnings estimates, is the cheapest of the Magnificent Seven tech stocks by this measure.
2. Nvidia
Nvidia (NVDA 2.13%) is clearly on every AI investor's radar screen. The company dominates the AI chip market, and this has helped it generate soaring earnings over the past few years -- with revenue and profit reaching record levels. But this stock doesn't look like it's in a bubble ready to burst. The company's solid reputation for excellence, along with its commitment to innovation, represents a moat. Nvidia aims to launch new AI chip updates on an annual basis, offering rivals little room to jump ahead.
And here's something else Buffett would like: the quality of Nvidia's leadership. Jensen Huang founded Nvidia more than 30 years ago and has successfully guided the company ever since. He's known for his resourcefulness, rapidly finding solutions to problems, and commitment to keeping Nvidia ahead of the pack.
NASDAQ: NVDA
Key Data Points
Strong management is crucial for a company's long-term success, and Buffett has recognized the importance of this to him. "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever," he wrote in his 1988 letter to shareholders.
Now, let's look at valuation. Nvidia isn't the cheapest AI stock around, but after recent declines across the sector, valuation has come down -- and today, it's at a very reasonable level considering the company's AI prospects. The stock trades for 31x forward earnings estimates, down from 50x earlier this year.
So, right now, Nvidia's moat, leadership, and reasonable price make it a Buffett-style stock that could help investors build significant wealth over the long term.
