Berkshire Hathaway (BRK.B) chair Warren Buffett stands as one of the most renowned investors in history, hinging his wealth on shrewd investments. Over his nearly six-decade career, the “Oracle of Omaha” openly admitted to a slew of missteps, both of omission and commission.
Reflecting on the present market scene, artificial intelligence (AI) emerges as a beacon of promise. How does Buffett perceive AI, and is he overlooking the burgeoning opportunities in this domain?
Warren Buffett Equates AI to Nuclear Bombs
During Berkshire Hathaway’s recent annual shareholder meeting, Buffett drew parallels between AI and nuclear weapons, cautioning that the technology could pave the way for unprecedented deceit – labeling it the “growth industry of all times.” Drawing an analogy, he likened AI to a genie, emphasizing, “We may wish we’d never seen that genie.”
Buffett’s reservations towards venturing into “emerging” and “sunshine” industries, in favor of traditional sectors like banking and insurance, are deeply ingrained. The nonagenarian steered clear of internet stocks during the 1990s, and more recently, bypassed investments in electric vehicles, cryptocurrencies, Web3, and AI.
Buffett Embraces His “Circle of Competence”
Buffett’s strategy of investing within his “circle of competence” largely dictates his reluctance towards companies in these burgeoning sectors. His skepticism towards cryptocurrencies is evident, famously dubbing Bitcoin (BTCUSD) as “rat poison squared.” Similarly, the lofty valuations of EV companies like Tesla (TSLA) place them outside the purview of a value investor like Buffett.
In hindsight, Buffett’s abstention from internet stocks in the ’90s and EV stocks in recent years seem prudent. Many tech giants from the dot-com era have either faded into obscurity or yielded lackluster returns – exemplified by Intel (INTC). While success stories like Amazon (AMZN) exist, they are rare.
Is AI the Next Internet Bubble?
Amidst the meteoric surge in stocks such as Nvidia (NVDA), prompting comparisons to Cisco (CSCO) during the dot-com era, speculations arise about AI being a bubble. However, notable distinctions separate the AI fervor from the dot-com bubble. Unlike the ’90s, where companies were valued based on obscure metrics like website clicks, Nvidia’s growth is underpinned by substantial earnings expansion.
Nvidia’s prowess in AI chip sales has translated into a nearly sixfold revenue increase and over an elevenfold surge in operating income across the last four fiscal years. While a significant number of companies investing in AI, notably utilizing Nvidia’s chips, are primed to monetize their investments in the future, their valuations haven’t spiraled to extreme levels, indicating a cautious optimism in the market at large.
Resisting the temptation to classify the current AI hype as a bubble, there is yet to reach a consensus point where we can conclusively term it as such, despite the soaring references to “AI” in companies’ earnings calls.
Buffett and the AI Rally
Key players in the AI landscape to date include Nvidia, Super Micro Computer (SMCI), Microsoft (MSFT), and Alphabet (GOOG), none of which Berkshire holds direct positions in, save for indirect exposure via its S&P 500 ETFs (VOO).
Nonetheless, as AI-enabled devices gain traction and widen the AI universe, former Berkshire heavyweight HP (HPQ) reaps the rewards of escalating sales of its AI-powered PCs. Despite Buffett opting out of this investment, missing out on HPQ’s upward AI trajectory, the investing maestro continues trimming his stock portfolio, bolstering Berkshire’s cash reserves to record levels.
Contrary to Berkshire’s purported absence in the AI boom, the conglomerate maintains inadvertent exposure to the sector through its substantial stake in Apple (AAPL), the largest holding in its portfolio.
Apple Garners AI Recognition
Following a slump in performance relative to its industry peers in 2023 – losing its $3 trillion market cap and the title of the world’s most valuable company earlier in 2024 – Apple finally finds traction in the AI realm. Post its Worldwide Developer Conference (WWDC) this week, Apple briefly surpassed Microsoft in market value, regaining its status as the world’s premier company and rejoining the $3 trillion market cap echelon, fueled by the market’s embrace of its newly-dubbed “Apple Intelligence.”
Buffett may not peg Apple as an AI powerhouse, in fact going as far as omitting it from tech classifications and assigning it to consumer goods instead. While Apple thrives in consumer product innovation with its iconic iPhone, its journey into AI integration in its products is unmistakable.
In sum, while Buffett may have sidestepped the initial round of the AI surge, Berkshire’s inadvertent exposure through Apple’s robust presence sets the stage for potential involvement in the forthcoming wave of AI advancements.