Is Warren Buffett Really Missing Out on the AI Boom?

Berkshire Hathaway (BRK.B) chair Warren Buffett is among the most prolific investors of all time, and made all his wealth through investments. The “Oracle of Omaha” has owned up to several mistakes -  both of omission and commission - over his nearly six-decade investing career.

Looking at the current markets, artificial intelligence (AI) has looked like the most promising investing theme. What are Buffett’s views on AI, and is he missing out on the boom in the sector?

Warren Buffett Compared AI to Nuclear Bombs

At Berkshire Hathaway’s annual shareholder meeting last month, Buffett compared AI to nuclear bombs, and predicted that the technology would make scamming the “growth industry of all times.” Buffett compared AI to a genie and emphasized, "We may wish we'd never seen that genie."

To be sure, Buffett has seldom participated in “emerging” and “sunshine" industries, and has generally preferred old-economy sectors like banking and insurance. The nonagenarian stayed out of internet stocks in the 1990s, and more recently has given industries like electric vehicles, cryptocurrencies, Web3, and AI a miss.

Buffett Likes to Invest in his “Circle of Competence”

Buffett’s reluctance to buy companies in these sectors largely stems from his strategy to invest in his “circle of competence.” Also, he has quite a bearish view of cryptocurrencies, and compares Bitcoin (BTCUSD) to “rat poison squared.” As for EVs, the kind of valuations that companies like Tesla (TSLA) trade at make them a “no-fly zone” for a value investor like Buffett.

In hindsight, Buffett staying away from internet stocks in the '90s and EV stocks over the last couple of years looks like a good decision. Most high-flying internet stocks of the dot-com days have either gone out of business or have since delivered dismal returns – Intel (INTC), for instance. There have been success stories, like Amazon (AMZN), but these have been few and far between.

Is AI the New Internet Bubble?

With the parabolic rise in some stocks – particularly Nvidia (NVDA), whose price action strikes some as too similar to Cisco (CSCO) in the dot-com days – a section of the market believes that AI is a bubble. However, we see some stark differences between the dot-com boom and the AI euphoria. For instance, unlike the dot-com days, when companies were valued on obscure metrics like the number of clicks, the rise in Nvidia is backed by solid growth in earnings.

The chip designer is minting money selling its AI chips, and its revenues have increased nearly sixfold, while operating income has risen by over 11x over the last four fiscal years. Arguably, most other companies that are investing in AI, primarily in buying Nvidia's chips, will monetize their investments in the coming years. However, their valuations haven’t shot through the roof amid the AI pivot - which seems to suggest that we are not exactly in a bubble in general, even as there might be some pockets of overvaluation and exuberance.

While it is risky to say “this time is different” when it comes to either the economy or the stock market, so far AI euphoria hasn’t reached decibels where we can term it as a bubble, even as a record number of companies are using the term “AI” in their earnings calls.

Is Buffett Missing Out on the AI Rally?

The usual AI plays so far have been names like Nvidia, Super Micro Computer (SMCI), Microsoft (MSFT), and Alphabet (GOOG). Berkshire does not have any exposure to any of these stocks, barring some indirect exposure through its holdings in S&P 500 ETFs (VOO).

However, the AI universe will now expand as sales of AI-enabled gadgets gain traction. Berkshire was once the biggest shareholder of PC maker HP (HPQ), which is seeing a revival in its fortunes – both on the topline and the bottom line – as sales of its AI PCs ramp up.

However, Buffett has exited the stock and missed out on HPQ's recent AI re-rating. The famed value investor has been on a stock selling spree for six consecutive quarters now, which has lifted Berkshire's cash pile to a record high.

However, it's not that Berkshire is totally missing out on the AI boom. Despite Buffett having trimmed its stake in Apple (AAPL), the iPhone maker is still the biggest holding of the conglomerate.

Apple Is Finally Getting Some “AI Respect”

After underperforming its “Magnificent 7” peers in 2023 - and losing its $3 trillion market cap, plus the title of the world’s biggest company, earlier in 2024 - Apple is finally getting some “AI respect.”

After its Worldwide Developer Conference (WWDC) earlier this week, Apple briefly dethroned Microsoft to reclaim its position as the world’s largest company, while also rejoining the $3 trillion market cap club, as markets gave a thumbs-up to what it called “Apple Intelligence.”

Buffett might not think of Apple as an AI play – and in fact, the legendary investor does not think of it as even a tech company, and instead puts it in the ranks of a consumer company. To be sure, Apple is to some extent a consumer company, and makes one of the most exciting consumer products of our times – the iPhone. However, it's also a tech company, and more recently, an AI company as it adds more AI features to its gadgets.

Overall, while Buffett might have missed round 1 of the AI rally, Berkshire does have a healthy - albeit inadvertent - exposure to the industry, thanks to its massive stake in Apple, which looks set to participate in the next round of the AI rally.