No game-changing innovation will garner more attention on Wall Street this year than artificial intelligence (AI).
AI involves the use of software and systems to handle tasks typically assigned to humans. Key is the inclusion of machine learning (ML), which allows software and systems to “learn” and evolve over time. This evolution is expected to add $15.7 trillion to the global economy by 2030, according to a report by PwC.
The innovative potential and big-dollar figures behind AI have drawn plenty of attention from Wall Street’s most successful money managers — and that includes billionaire CEO Warren Buffett. Berkshire Hathaway (BRK.A 0.05%) (BRK.B 0.04%), along with his investment team. Nearly half of Berkshire’s $365 billion portfolio is invested in three AI stocks.
However, Berkshire’s AI exposure doesn’t stop there. Since acquiring reinsurance company General Re 25 years ago, Berkshire Hathaway owns specialty-investment firm New England Asset Management (NEAM). Although the Oracle of Omaha does not oversee NEAM’s investment portfolio like Berkshire Hathaway’s main investment portfolio, the $690 million NEAM’s invested assets are part of Buffett’s company. Thus, it is Warren Buffett’s secret portfolio.
As of June 30, Warren Buffett’s $690 million secret portfolio held shares in five artificial intelligence stocks, based on Form 13F filings. Market values close on September 1, 2023.
Alphabet (Class A shares, GOOGL): $4,124,064 in market value
You’ll find the first AI stock in Oracle of Omaha’s Hidden Portfolio the alphabet (GOOGL 0.59%) (GOOG 0.61%), the parent company of internet search engine Google and streaming platform YouTube, among its many subsidiaries. New England Asset Management owned 30,400 Class A shares of Alphabet ( GOOGL ) at the end of June and had a market value of $4.1 million as of September 1, 2023.
Alphabet is using AI in a variety of ways. Interestingly, it is being deployed by Google to further enhance the quality of search results for the world’s leading internet search engine. It is also being used by YouTube, the world’s second most visited social platform, to remove content that violates its terms of service.
What may not be apparent is that Alphabet is leaning on AI solutions from Google Cloud, the company’s cloud-infrastructure service offering. Google’s AI-driven ML solutions allow businesses to build their own models that can analyze large amounts of user data and make predictions about how they will respond to changeable changes (eg, new product introductions, advertising changes, etc.).
Of course, Alphabet’s main attraction is its world-leading search engine. As of April 2015, Google accounted for no less than 90% of the global Internet search share. This virtual monopoly in search makes Alphabet a predictable cash cow.
Taiwan Semiconductor Manufacturing Company: Market Value $2,080,467
Another AI stock you’ll find in Warren Buffett’s secret portfolio Taiwan Semiconductor Manufacturing Co (TSM -2.40%), commonly known as “TSMC”. New England Asset Management owned 22,325 shares of TSMC at the end of the second quarter.
TSMC serves as the supply-chain backbone of the AI movement. It is the world’s leading chip-fabrication company and is currently the leading manufacturer of graphics processing units (GPUs) used to accelerate the processing of high-end computer data centers. Major AI-GPU players, including Nvidia (NVDA -1.74%) And Advanced Micro DevicesLeaning on TSMC for production.
Interestingly, Nvidia, which was once in Buffett’s secret portfolio, has seen sales of its A100 and H100 GPUs skyrocket due to inadequate chip on wafer on substrate (CoWoS) capabilities at TSMC. TSMC is in the process of doubling its CoWoS capacity, which it hopes will ease Nvidia’s AI-GPU supply-demand imbalance.
Apple: Market Value $2,384,165
The third artificial intelligence stock you’ll find in Warren Buffett’s $690 million secret portfolio is the least surprising: tech stocks. apple (AAPL -2.92%). Apple is holding the top, by one significantly Amount, the investment portfolio overseen by the Oracle of Omaha at Berkshire Hathaway. As of June 30, NEAM owned 12,584 shares of Apple.
While AI has become an unmissable trend in the past few months, it has been incorporated into Apple’s physical products for over a decade. Apple’s introduction of voice-based digital assistant Siri in 2011, along with the continued evolution of ML through AutoCorrect technology, are examples of how AI is changing the utility of its products.
The company’s Vision Pro augmented/virtual reality headset, which is set to go on sale next year, is another front-and-center example of AI innovation and integration. Vision Pro relies on eye tracking and hand-motion tracking, among other features.
But as I’ve pointed out on several occasions, Apple’s lure is its capital-return program and cash-flow consistency. Apple has repurchased more than $600 billion worth of its common stock since introducing a share-buyback program in 2013 and generated more than $113 billion in operating cash flow over the past 12-month period.
NXP Semiconductors: $9,374,714 in market value
A fourth AI stock is Warren Buffett’s under-the-radar portfolio of investments NXP Semiconductors (NXPI -1.82%). At the end of June, NEAM owned 44,650 shares of NXP, worth $9.4 million as of September 1.
NXP’s ties to AI can primarily be traced to the various processors and microcontrollers used in next-generation vehicles. In January, for example, NXP introduced its family of i.MX 95 application processors, which are responsible for, among other things, ensuring critical safety functions in next-gen vehicles are met.
NXP Semiconductors also has processing applications beyond the automotive industry. Its ML and deep-learning solutions are used by Internet-of-Things (IoT) applications and in the industrial sector. This could include something as simple as securing a home WiFi connection or ensuring the security of an industrial network.
While many AI stocks trade at nosebleed valuations, NXP Semiconductors offers its shareholders a discounted forward price-to-earnings (P/E) ratio of just 14.
Broadcom: $13,074,712 in market value
The fifth and final AI stock in Warren Buffett’s $690 million secret portfolio is a semiconductor-solutions specialist. Broadcom (AVGO -1.75%). Broadcom’s 14,985 shares at the end of June — a market value of nearly $13 million — make NEAM’s largest bet on AI.
The most exciting AI solution Broadcom has unveiled to date is its Jericho3-AI chip. This networking chip, introduced by Broadcom in April, is capable of scaling connectivity to 32,000 high-powered GPUs in AI-accelerated data centers. In short, Jericho3-AI is a type of mediator tasked with maximizing network utilization and virtually eliminating the potential for traffic congestion.
However, NEAM’s investment team did not put the fund’s capital to work at Broadcom for Jericho3-AI. Instead, it probably has a lot to do with the 5G revolution. Broadcom generates a large percentage of its sales from supplying wireless chips and solutions used in next-generation smartphones. As wireless infrastructure is upgraded to support 5G download speeds, a device-replacement cycle has begun that should continue through the midpoint of the decade.
Broadcom’s backlog is nothing to sneeze at. As of July 31, 2022, the company was sitting on a $31 billion backlog. Although CEO Hock Tan has not been forthcoming with his company’s backlog this year, booking orders about a year in advance indicate strong demand for the company’s products.