Warren Buffett has invested $157 billion in these two ‘Magnificent Seven’ artificial intelligence (AI) stocks

By | April 1, 2024

Warren Buffett typically doesn’t invest in high-flying growth stocks that build cutting-edge technology. “Berkshire does not big on newcomers,” he jokes in his most recent annual letter to shareholders. Nevertheless, he has invested a large part of his capital in it Berkshire Hathaway‘S (NYSE: BRK.A) (NYSE: BRK.B) portfolio of two artificial intelligence (AI) giants, both of whom are members of the vaunted Magnificent Seven.

The Magnificent Seven is a group of mega-cap companies whose shares have largely determined the company’s performance S&P500 since early 2023. They are mainly technology leaders and not the typical Buffett investments. But if Buffett sees value in these two stocks, they can likely deliver strong returns for investors, regardless of whether they lean more toward Buffett’s investing style or more toward growth stocks.

These are the two Magnificent Seven AI stocks that Buffett has put $158 billion into.

An image of a computer chip with AI printed on it.

Image source: Getty Images.

1. Apple ($155.3 billion)

Apple (NASDAQ: AAPL) has grown into easily Berkshire Hathaway’s largest stock position. Buffett initially started accumulating shares of Apple between 2016 and 2018. And with the stock’s phenomenal growth since then, Berkshire’s position has ballooned to a value of about $155 billion today.

Although Buffett has trimmed his Apple position a few times in the past, this appears to be mainly for tax purposes. Buffett even expressed regret about selling stocks that received a tax option in the past, but late last year he appeared to repeat the same mistake.

Given the size of Berkshire’s position in Apple, no one should question Buffett’s belief in the company and its stock to deliver strong results in the future. At Berkshire’s annual shareholder meeting last year, Buffett called Apple “a better company than any company we own.”

What does Buffett like about Apple?

While Apple is building several technologies, including artificial intelligence, Buffett sees it as an unparalleled consumer products company. There is no consumer product as ubiquitous as the smartphone, and Apple’s share of the smartphone market, especially the premium smartphone market, is unparalleled.

Apple has taken advantage of that position in recent years by expanding its ecosystem and building a large services business. The iPhone has, in a sense, become a platform company, allowing Apple to realize ever-increasing profit margins. Services as a group generate almost twice as much profit per dollar as Apple’s hardware sales.

Buffett is also a fan of Apple’s massive capital return program. He notes that Berkshire’s stake in Apple increases slightly every year as Apple buys back a large portion of its shares. The company produces about $100 billion in free cash flow annually, and returns almost all of it to shareholders through dividends and buybacks. As a result, shareholders including Berkshire Hathaway can claim a larger share of Apple’s profits every year.

Apple shares trade at a price-to-earnings ratio of 26, a slight premium to the S&P 500. But that premium is justified by its large cash position and share buyback program.

2. Amazon ($1.8 billion)

The other member of the Magnificent Seven in Berkshire’s portfolio is Amazon (NASDAQ: AMZN). Amazon is far from a Buffett stock. In an interview several years ago, he even said that the company is outside his circle of competence, so he doesn’t consider missing the boat on the stock a mistake. Nevertheless, his company owns about $1.8 billion worth of Amazon stock.

That’s likely because one of Buffett’s partner portfolio managers, Ted Weschler or Todd Combs, took a position in 2019.

There’s a lot to like about Amazon. “It changed your behavior, everyone’s behavior,” Buffett said of the company in 2017. Indeed, the Amazon Prime network has become a major moat for the company, making shoppers and sellers more loyal to Amazon. That creates a flywheel that allows Amazon to invest more in Prime benefits and faster shipping, attracting more shoppers and more sellers.

Buffett is also impressed with Amazon’s cloud computing business, which accounts for the bulk of Amazon’s operating revenue. That could grow quickly with the growth of artificial intelligence, and Amazon is investing heavily to keep up with competitors in the space. That includes a $4 billion investment in Anthropic and designing its own AI training and inference chips for its servers to support new major language models and AI-powered applications.

The rapid growth of Amazon’s cloud computing business, along with burgeoning advertising sales, should support the company’s continued margin expansion, delivering strong free cash flow growth – the key metric by which management bases its financial assesses results.

Amazon trades at a price-to-sales ratio of just 3.29, which is below its five-year average, despite increasingly promising prospects for margin expansion.

Should You Invest $1,000 in Berkshire Hathaway Right Now?

Consider the following before buying Berkshire Hathaway stock:

The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor service has more than tripled the return of the S&P 500 since 2002*.

View the 10 stocks

*Stock Advisor returns March 25, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy has positions at Amazon and Apple. The Motley Fool holds positions in and recommends Amazon, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Warren Buffett Has Invested $157 Billion In These Two ‘Magnificent Seven’ Artificial Intelligence (AI) Stocks Originally published by The Motley Fool

Leave a Reply

Your email address will not be published. Required fields are marked *