Warren Buffett’s investment strategy is renowned for its focus on value investing rather than chasing high-growth technology stocks. However, despite his traditional approach, Buffett has allocated a substantial portion of Berkshire Hathaway’s portfolio to two artificial intelligence (AI) giants, both of which are part of the esteemed Magnificent Seven.
The Magnificent Seven refers to a group of mega-cap companies that have played a significant role in driving the performance of the S&P 500 since the beginning of 2023. These companies are primarily leaders in the technology sector, a departure from Buffett’s usual investment preferences. Nevertheless, Buffett’s decision to invest in these AI stocks suggests that they offer compelling value propositions, capable of generating robust returns for investors, irrespective of their alignment with Buffett’s traditional investment style or the growth-oriented approach.
Let’s delve into the two AI stocks that Buffett has committed a staggering $158 billion to.
1. Apple ($155.3 billion)
Apple (NASDAQ: AAPL) has become the cornerstone of Berkshire Hathaway’s investment portfolio, surpassing all other equity holdings by a considerable margin. Warren Buffett began accumulating shares of Apple between 2016 and 2018, and the stock’s remarkable growth since then has propelled Berkshire’s position to approximately $155 billion in value today. Despite some trimming of the Apple position in the past, Buffett’s moves seem primarily motivated by tax considerations rather than doubts about the company’s prospects. Indeed, Buffett has expressed regret over selling shares in the past, recognizing the enduring strength of Apple’s business model.
With such a substantial investment in Apple, Buffett’s confidence in the company’s ability to deliver robust returns in the future is evident. He has even gone so far as to praise Apple as “a better business than any we own” at Berkshire’s annual shareholder meeting.
So, what is it about Apple that has captured Buffett’s admiration?
Buffett views Apple not just as a technology company but as an unparalleled force in consumer products. With its dominance in the smartphone market, particularly in the premium segment, Apple stands out as a leader in the industry. Moreover, Apple has leveraged its market position to expand its ecosystem and develop a thriving services business. The iPhone, in particular, has evolved into a platform business, driving increasing profit margins for Apple. The services segment, which includes offerings like the App Store and Apple Music, generates nearly double the profit per dollar compared to hardware sales.
Another aspect of Apple that Buffett appreciates is its robust capital return program. Apple consistently generates around $100 billion in free cash flow annually and allocates the majority of it to shareholders through dividends and share buybacks. This approach not only enhances shareholder returns but also increases Berkshire’s stake in Apple over time.
Despite trading at a slightly higher forward price-to-earnings (P/E) multiple compared to the broader market, Apple’s significant cash reserves and commitment to share buybacks justify this premium. Overall, Buffett’s investment in Apple underscores his confidence in the company’s long-term prospects and its ability to deliver value to shareholders.
2. Amazon ($1.8 billion)
The other member of Berkshire Hathaway’s Magnificent Seven portfolio is Amazon (NASDAQ: AMZN), a company that falls outside of Warren Buffett’s traditional investment approach. In fact, Buffett himself admitted that Amazon’s business lies beyond his circle of competence in a candid interview several years ago. Nevertheless, Berkshire Hathaway holds approximately $1.8 billion worth of Amazon stock, likely initiated by one of Buffett’s partner portfolio managers, Ted Weschler or Todd Combs, in 2019.
Despite Buffett’s reservations, there are compelling reasons to be bullish on Amazon. As Buffett acknowledged in 2017, Amazon has fundamentally transformed consumer behavior on a global scale. The Amazon Prime ecosystem, in particular, serves as a formidable competitive advantage, fostering customer and merchant loyalty through its expansive benefits and expedited shipping services. This virtuous cycle enables Amazon to reinvest in Prime enhancements and faster delivery, further solidifying its position in the e-commerce landscape.
Moreover, Buffett recognizes the strength of Amazon’s cloud-computing division, Amazon Web Services (AWS), which constitutes the lion’s share of the company’s operating income. With the proliferation of artificial intelligence (AI), AWS stands to experience rapid growth, prompting Amazon to make substantial investments to stay ahead in the competitive cloud market. Notably, Amazon has allocated $4 billion toward Anthropic, an AI research company, and is developing its own AI chips for server infrastructure to support advanced language models and AI-driven applications.
The robust expansion of AWS coupled with Amazon’s burgeoning advertising revenues are poised to drive further margin improvement for the company, resulting in robust free cash flow growth—a key metric for management’s financial assessment.
Despite its promising prospects, Amazon’s current price-to-sales ratio of 3.29 sits below its five-year average, indicating potential undervaluation despite the anticipated margin expansion. This discrepancy suggests that Amazon’s stock may offer compelling value for investors bullish on its future growth trajectory.