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Warren Buffett is not one to invest based on new technology trends. That doesn’t mean he ignores them completely, though.
When asked about artificial intelligence (AI), berkshire hathaway‘s (BRK.A -0.44%) (BRK.B -0.25%) “Everything in the world can be changed except how people think and what they do,” he said at a shareholder meeting in May, paraphrasing Albert Einstein’s comments about the invention of the atomic bomb.
As such, he has some trepidation about how people and companies will use AI, saying, “I get a little worried when something can do all sorts of things. Because we know we can’t afford not to invent it.” Nevertheless, he happens to have several companies leading the development and distribution of artificial intelligence in Berkshire’s portfolio.
There’s probably one stock he likes best among AI stocks. apple (AAPL -0.54%). Here’s why:
Image source: Motley Fool.
“A business as good as any we own.”
If there was any doubt that Apple, which accounts for nearly half of Berkshire’s stock portfolio, is Mr. Buffett’s favorite stock, he made his love for the iPhone maker clear at this year’s shareholder meeting. He called the tech giant “a better company than anything we own.”
In other words, he wants to own more of Apple. Berkshire currently owns about 5.9% of Apple’s outstanding shares, which Buffett notes has increased each quarter as Apple management buys back its own stock. . He also said selling some shares for tax purposes in 2020 was actually a mistake. And given the fact that Apple’s stock price has risen 47% since the end of 2020, he’s probably right.
What makes Apple a better business than wholly owned Berkshire subsidiaries like GEICO and BNSF Railway? It’s the fact that Apple has created products that have become essential to modern life and loved by consumers. “I mean, it’s an extraordinary product. There’s no product out there that we own 100%,” Buffett said of the iPhone.
Smartphones are an invention that changed the world. And Apple’s position in the smartphone market is incredibly strong despite dozens of competitors. The company’s market share of global smartphone sales is in the low teens, but its phones typically stay in use longer than its competitors. As a result, iPhone accounts for nearly 30% of smartphones used worldwide, including more than 58% of smartphones in the United States.
Apple’s strong brand and ability to create great user experiences have helped it maintain its dominance in this space. And other companies have tried to copy Apple’s strategy, but so far they’ve found little success. Apple is unlikely to lose its competitive advantage anytime soon.
AI innovators masquerading as consumer goods companies
Buffett primarily views Apple as a consumer goods company. The company has a lot of technology behind its products, but it’s those products, not the technology, that it sells to consumers. However, investors cannot ignore the fact that Apple has invested heavily in his AI and stands to benefit from the expanded use of AI technology.
During Apple’s fourth-quarter earnings call in November, CEO Tim Cook said the company is investing heavily in generative AI. His October report in Bloomberg focused on building his own large-scale language models and testing his ChatGPT-style chatbot, which he said would amount to nearly $1 billion a year. . That’s effectively a lot of money for Apple, which has about $160 billion in cash and investments on its balance sheet and generates billions of dollars in free cash flow every quarter, but it’s a huge investment for most companies.
Additionally, Apple has made significant improvements to its chip design. The M3 chip in the company’s latest Macs has a redesigned GPU and increased working memory for more advanced AI processing. That makes the company’s high-end MacBook the top choice for his AI developers.
Image source: Getty Images.
Similarly, the chip inside the iPhone 15 uses the same chip platform as the M3. This leads the way to on-device AI applications. This means Apple can store user data securely on the device rather than sending it to his web servers, opening the door to AI use cases involving more sensitive information.
In fact, Apple’s biggest AI development will tap into the very thing that got Buffett hooked on the company in the first place. That means Apple has a broad and growing platform to reach consumers. This should benefit the company’s fast-growing, high-margin services business for years to come, as AI becomes more pervasive in our lives, much like smartphones have become over the past decade. Apple will be one of the companies bringing this use of AI to the masses.
No wonder Apple is Buffett’s favorite company. And despite the fact that the stock is trading near all-time highs, we may be at the start of Apple’s next round of AI-powered growth.
Adam Levy holds a position at Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.
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