47% of Warren Buffett’s portfolio is invested in this artificial intelligence (AI) stock

Warren Buffett’s 47% stake may surprise investors. berkshire hathaway The portfolio consists of one stock. For an investment manager that preaches the virtues of diversification, this decision seems counterintuitive to say the least, especially when one can easily assume that artificial intelligence (AI) stocks imply higher risk.

However, some investors may be relieved to know that the stock price is below. apple (AAPL -3.58%)is the largest listed company in terms of market capitalization. Here’s why Buffett’s team is sticking with the tech giant, and why it’s likely to remain a Berkshire Hathaway mainstay for some time to come.

AI, Apple, Berkshire Hathaway

To be sure, Buffett’s team isn’t directly targeting AI stocks, but seems to be focusing on solid companies that happen to be using AI. Other so-called “Buffett AI stocks” include: Amazon and snowflake, which together account for less than 1% of Berkshire’s portfolio. And while Buffett has long since belatedly embraced technology stocks, Apple is the only technology stock in his company worth more than $10 billion.

Nevertheless, Apple has become a significant investor in AI. Virtually all of the company’s latest products and services apply AI at some level. The company has also long funded doctoral fellowships through its Apple Scholars program, making it a major research force.

Additionally, the company’s foray into AI could indirectly impact Buffett’s team’s stock holdings. AI controls his one of the major smartphone operating systems. To this end, AI can improve the user experience, for example by powering Siri neural networks and Face ID. And because Apple designs the chips, they have many options for integrating AI into their products in ways we don’t know about.

Apple finance and AI

Investors should also note the virtuous cycle fueled by Apple and its AI. The company’s current liquidity, after taking into account unrealized losses on short-term investments, is approximately $162 billion. This would give the company greater choice in funding AI research and efforts, and could help Apple buy technology it can’t successfully manufacture on its own. The company’s products and related services generated net income of $97 billion in fiscal year 2023 (ending September 30).

The company generated nearly $100 billion in free cash flow during the fiscal year, although net income fell 3% for the year due to the weak consumer economy. Much of this funding will likely go back into AI research, improving the product and strengthening the company’s net income and free cash flow.

This virtuous cycle has also led to profits for shareholders, with Apple stock rising more than 50% in 2023. As a result, the company’s price-to-earnings ratio (PER) increased to approximately 32 times, a level close to its highest price in several years. However, the valuation remains lower than Amazon. microsoftand Nvidia And one is slightly more expensive than its Google parent. alphabetindicating that the market values ​​the company fairly.

Berkshire’s Apple investment

Investors should view Apple as an AI stock, but that’s not likely the direct reason why Berkshire Hathaway has such a large position in the company. In fact, Apple has become a leader in this field due to its AI research and AI-powered applications. And as AI becomes essential to investors, the company is tying it more clearly to product features.

But the popularity of Apple’s products and the company’s financial health are likely reasons why Berkshire has confidence in Apple at an unprecedented level. To this end, investors should expect Berkshire to continue to focus on Apple’s financials, rather than directly on AI.