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Warren Buffett's Best 3 Artificial Intelligence (AI) Stocks

Motley Fool - Sat Dec 2, 2023

Most people don't associate Warren Buffett with tech trends, as he has consistently avoided investing in many new technologies because he says he doesn't understand them. Even though his company owns a lot of Apple, it's a relatively simple business because it's all about selling hardware. While some may snicker at this comment of not investing in tech, few can deny that this approach has worked well for him and Berkshire Hathaway.

Still, that doesn't mean that Buffett doesn't own any stocks associated with artificial intelligence (AI). In fact, there are quite a few in his portfolio. Among them are Amazon (NASDAQ: AMZN), Snowflake (NYSE: SNOW), and Mastercard (NYSE: MA), and each looks like a candidate to be bought now.

AI may not be the first reason these stocks were purchased

Each of these companies uses AI differently than the others.

For Amazon, its usage is twofold. First, it uses AI to make its delivery business more efficient and predict product demand. Second, Amazon Web Services (AWS) is a cloud computing juggernaut, which positions it well as companies use cloud computing to store proprietary data needed for AI models and develop their own. Amazon may not be the most "in your face" AI investment, but it is near the top of the list for companies that will benefit from AI adoption.

Snowflake is more of a straight-line AI investment, as its data cloud software helps its clients store information efficiently and use it to create AI models. Furthermore, clients can sell their datasets on the Snowflake marketplace, which is incredibly useful for developing an AI model if you don't have the raw data. Berkshire Hathaway bought Snowflake stock at its IPO and hasn't sold a share since, showing its confidence in its future.

Finally, Mastercard, the credit card giant, deploys AI to prevent fraud and safeguard transactions. Now, Mastercard is expanding its consulting practice, which uses its economic data to analyze purchases from all over the globe. AI is invaluable for retailers and can deliver real-time insights, allowing clients to adjust their strategies faster than ever before.

All three companies have legitimate investment cases as AI companies but are also devoted to their primary missions. This makes them great investments as they are less likely to get caught up in the AI hype.

Still, Berkshire is a relatively small shareholder in these businesses as Amazon, Snowflake, and Mastercard only make up 0.4%, 0.3%, and 0.5% of its investing portfolio, respectively. But that doesn't mean they or you can't purchase shares at a moment's notice.

Each looks like a buy right now

Each of these companies is in a different phase. Mastercard is the most mature and has developed its margins to near-optimized levels. Amazon is in a transitional phase of optimizing for profits, and Snowflake is still in a growth-at-all-costs mindset, which causes it to be deeply unprofitable. As a result, each of these companies needs to be examined using a slightly different metric.

For Mastercard, I'll use its price-to-earnings (P/E) ratio, as we have strong historical data of its usual trading range.

MA PE Ratio Chart

MA PE Ratio data by YCharts.

Mastercard has often fetched a premium price (and it still does), but right now, it is near the cheapest you've been able to purchase the stock since 2018 (besides a few momentary dips).

Amazon is nearing full-term profitability, so I'll use the forward P/E ratio.

AMZN PE Ratio (Forward 1y) Chart

AMZN PE Ratio (Forward 1y) data by YCharts.

A valuation of 43 times 2024 earnings isn't a cheap price to pay, but those are analyst estimates that can be wrong. AWS is a sleeping giant that will benefit tremendously from AI investment, and its improving margin picture will continue to make Amazon an attractive stock. While it's likely too expensive for Berkshire's taste, I think it's still a fair price.

Last is Snowflake, whose price-to-sales ratio is quite expensive.

SNOW PS Ratio Chart

SNOW PS Ratio data by YCharts.

Because Snowflake has placed itself into a lucrative opportunity, investors have bid up the stock drastically in expectation of future performance. There's no sugarcoating it; Snowflake stock is incredibly expensive, but if it's as vital to AI as many think, the price you pay today will be worth it years later.

While Buffett may not be known as an AI investor, his portfolio indicates otherwise. All three stocks are solid picks, and investors should be willing to purchase them at today's prices.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon, Mastercard, and Snowflake. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Mastercard, and Snowflake. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.

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