The Oracle of Omaha's large indirect investment in artificial intelligence (AI) stocks is shrinking fast.
Berkshire Hathaway Inc. (BRK.A 1.34%; BRK.B 1.35%) CEO Warren Buffett has been teaching Wall Street and investors alike for nearly six decades. While he makes mistakes like any other investor, the “Oracle of Omaha” has generated a total return of nearly 5.5 million% on his company's Class A shares (BRK.A) since he became CEO.
Buffett has earned himself a huge following for his ability to find incredible bargains hiding in plain sight, and investors are eagerly awaiting the release of Berkshire Hathaway's quarterly 13F report to find out what stocks Buffett and his top investment advisers, Todd Combs and Ted Weschler, have bought and sold.
While Warren Buffett is often seen as a fan of value-driven, mature businesses, he and his team are putting a sizable chunk of their investment portfolio into companies being driven by the artificial intelligence (AI) revolution.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
It's hard not to be fascinated by the long-term potential of AI-driven software and systems to learn and evolve without human intervention. The technology's nearly limitless usefulness has led analysts at PwC to predict it could add $15.7 trillion in value to the global economy by year 10.
At one time, 46% of Berkshire's investment portfolio, or about $189 billion, was spread across four high-profile AI stocks, but Buffett and his investment team have reduced their holdings in AI stocks by roughly 50%, according to the company's latest 13F filing with the Securities and Exchange Commission.
The Oracle of Omaha and his team made big bets on four AI stocks
Before we begin this discussion, let me point out that while Warren Buffett may have little understanding or interest in artificial intelligence as a technology, he has a firm grasp on consumer behavior and how AI will impact productivity growth and consumption changes in the future.
The pillar of Berkshire Hathaway's AI investments has always been tech stock Apple (AAPL, 0.37%), its largest holding and one in which Buffett and his team have put significant amounts of money.
At its annual Worldwide Developers Conference in June, Apple unveiled “Apple Intelligence,” a range of AI-powered initiatives designed to drive growth. These new innovations include making its voice assistant, Siri, more intuitive and introducing ChatGPT-powered chatbots to its operating system.
The other three AI stocks that Buffett and his fellow investors were betting on (albeit to a lesser extent than Apple) were e-commerce giant Amazon (AMZN -1.36%), China-based electric vehicle (EV) maker BYD (BYDD.F 1.57%) and cloud data warehouse company Snowflake (SNOW -2.08%).
Amazon is known for its dominance in the online marketplace, but it's also a leading cloud infrastructure services platform: Amazon Web Services (AWS) accounted for 33% of global cloud infrastructure services spending (as of June 30), according to Canalys. Amazon is aggressively investing in generative AI solutions to help AWS customers with everything from virtual chat agents to customized marketing.
BYD is using artificial intelligence as a way to improve driver safety. In January, the company unveiled Xuanji Architecture, an intelligent driving platform that offers a range of advanced driver assistance technologies. BYD is also working with Chinese regulators to test Level 3 autonomous vehicle capabilities on China's roads, which wouldn't be possible without the use of AI.
Finally, Berkshire's best and brightest have been investing in Snowflake since its IPO in 2020. Snowflake's infrastructure is built on the most popular cloud infrastructure services platform, allowing customers to seamlessly share and access data. Similar to Amazon, Snowflake plans to deploy generative AI solutions within its data cloud, which will enable customers to build and train language models at scale.
Image source: Getty Images.
Buffett and fellow investors have significantly reduced their holdings of AI-related stocks
But Berkshire Hathaway's 13F filing for the June quarter showed that Buffett, Combs and Weschler had significantly reduced their investments in artificial intelligence.
While Berkshire's holdings in Amazon remain unchanged at 10 million shares and BYD sales activity has been minimal for years (Buffett's company owns about 54.2 million shares of BYD), the same cannot be said for Apple or Snowflake.
More than 389 million shares of Apple stock were up for sale in the second quarter, roughly 49% of Berkshire's holdings as of March 31. Including shares sold in the fourth quarter of 2023 and the first quarter of 2024, Berkshire's three investors have overseen the disposal of more than 500 million Apple shares in a nine-month period.
During Berkshire Hathaway's annual shareholder meeting in early May, Buffett suggested the company's sale of Apple shares may be tax-related. The Berkshire chief believes the top corporate tax rate is likely to rise from its current historically low 21%. Thus, locking in unrealized gains and paying a lower tax rate now would be viewed favorably by Berkshire Hathaway investors in hindsight.
But there may be more to the selloff than meets the eye. While Apple's AI plans certainly ignited the stock in June, the company's performance over the past year has been disappointing. iPhone sales for the first nine months of fiscal 2024 are down 1% compared to the same period last year. Outside of its steadily growing subscription services division, Apple's physical device sales have been a drag.
Apple no longer has the incredible valuation and growth story it had when Buffett first invested in the company in early 2016.
Buffett and his team sold nearly 50% of their Apple shares in the quarter ending June, but sold all 6,125,376 shares of Snowflake.
Snowflake never fit the mold of a typical Buffett stock: While it had the clear competitive advantages that Buffett, Combs, and Weschler looked for as investors, its astronomical valuation premium left a lot of room for improvement.
Snowflake's revenue growth has continually shrunk over the past few years, preventing it from sustaining anything close to the valuation premium it once commanded, and even after a 70% drop from its all-time high, it is not particularly attractively valued, despite being well-positioned to play a key role in the continued evolution of the enterprise cloud ecosystem.
Buffett may not be done selling AI stocks just yet, because history suggests the artificial intelligence bubble is about to burst.
