Warren Buffett typically shies away from high-flying, cutting-edge technology stocks. In his recent shareholder letter, he humorously acknowledges Berkshire Hathaway’s conservative investment approach. However, despite this stance, a substantial portion of Berkshire’s portfolio, valued at $157 billion, is dedicated to two artificial intelligence (AI) giants that are part of the esteemed Magnificent Seven group.

The Magnificent Seven comprises megacap companies that have been driving the S&P 500’s performance. These technology leaders, not typical of Buffett’s usual picks, hold promise according to the Oracle of Omaha. Their inclusion in Buffett’s portfolio suggests the potential for strong returns, blending elements of his investment philosophy with the appeal of growth stocks.

Let’s delve into the specifics of the two AI stocks from the Magnificent Seven that have caught Warren Buffett’s discerning eye.

Image source: Getty Images.

Apple’s Staggering $155.3 Billion Investment

Apple, the pinnacle of Berkshire Hathaway’s equity holdings, stands as a testament to Buffett’s evolving investment strategy. Initially acquiring Apple shares between 2016 and 2018, Buffett witnessed remarkable growth in the value of his holdings, currently soaring at $155.3 billion.

Despite trimming the Apple position on certain occasions, ostensibly for tax considerations, Buffett has expressed profound faith in the company’s potential. Referring to Apple as “a better business than any we own” at Berkshire’s annual shareholder meeting, Buffett’s confidence in Apple’s continued success remains unwavering.

What captivates Buffett about Apple’s allure?

While Apple dabbles in various technologies like artificial intelligence, Buffett perceives it primarily as a consumer product powerhouse. At the helm of smartphone industry dominance, particularly in the premium segment, Apple’s unrivaled market share underscores its significance.

In recent years, Apple leveraged this market position by expanding its ecosystem and bolstering its services segment. The metamorphosis of the iPhone into a platform business has amplified Apple’s profit margins, with services generating double the profits per dollar compared to hardware sales.

Buffett commends Apple’s robust capital return program, noting Berkshire’s stake increment facilitated by Apple’s substantial buyback activities. With an annual free cash flow of around $100 billion, Apple redistributes a large chunk to shareholders through dividends and buybacks, reinforcing shareholder value increment.

Apple shares remain a prominent fixture in Berkshire’s portfolio, reflecting Buffett’s enduring confidence in the company’s trajectory.

The Unwavering Strength of Berkshire Hathaway

Boasting a forward P/E multiple of 26, Berkshire Hathaway stands at a slight premium to the S&P 500. However, this premium finds its rationale in the company’s generous cash reserves and robust share buyback initiative.

A Glimpse into Amazon’s Realm at Berkshire

Among the cherished assets in Berkshire’s portfolio lies Amazon (NASDAQ: AMZN), a standout member of the “Magnificent Seven.” Despite Amazon being beyond Warren Buffett’s realm of expertise, his firm holds a notable $1.8 billion stake in the e-commerce giant. This position is likely the brainchild of one of Buffett’s adept portfolio managers, Ted Weschler or Todd Combs, who established the stake in 2019.

Amazon’s Impressive Ventures and Buffett’s Fascination

Buffett’s admiration for Amazon is palpable, with the Oracle acknowledging the e-commerce titan’s transformative impact on consumer behavior. The Amazon Prime ecosystem has fortified the company’s competitive edge, fostering customer and seller loyalty to Amazon through a virtuous cycle of investments in Prime benefits and expedited shipping.

Moreover, Buffett finds himself captivated by Amazon’s lucrative cloud-computing segment, a key driver of the company’s earnings. With the proliferation of artificial intelligence standing as a catalyst for growth, Amazon’s hefty investments, like the $4 billion outlay in Anthropic, demonstrate its commitment to staying ahead in the AI sphere. Notably, Amazon’s in-house design of AI-oriented chips for its servers underscores its dedication to powering cutting-edge large language models and AI-driven applications.

Emboldened by the rapid expansion in Amazon’s cloud-computing domain and the promising trajectory of its advertising arm, Buffett foresees sustained margin expansion and robust free-cash-flow growth – pivotal metrics dictating management’s financial evaluation.

A Strategic Glance at Amazon’s Valuation

Trading at a modest price-to-sales ratio of 3.29, Amazon’s current valuation belies its burgeoning potential for margin growth. Despite standing below its five-year average, the company’s compelling prospects for expanded margins hint at an auspicious future for investors.