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Warren Buffett's $690 Million Secret Portfolio Is Invested in 5 Artificial Intelligence (AI) Stocks

Motley Fool - Fri Sep 8, 2023

No game-changing innovation is garnering 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. The key is the incorporation 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 attracted plenty of attention from Wall Street's most successful money managers -- and that includes billionaire CEO Warren Buffett of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B), along with his investment team. Nearly half of Berkshire's $365 billion portfolio is invested in three AI stocks.

Warren Buffett at Berkshire Hathaway's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

However, Berkshire's AI exposure doesn't stop there. Due to the acquisition of reinsurance company General Re 25 years ago, Berkshire Hathaway also owns specialty-investment firm New England Asset Management (NEAM). Although the Oracle of Omaha doesn't oversee NEAMs investment portfolio like he does Berkshire Hathaway's core investment portfolio, the $690 million NEAM holds in invested assets is, nevertheless, part of Buffett's company. Thus, it's Warren Buffett's secret portfolio.

Based on Form 13F filings, as of June 30, Warren Buffett's $690 million secret portfolio was holding shares in five artificial intelligence stocks. Market values are as of the closing bell on Sept. 1, 2023.

Alphabet (Class A shares, GOOGL): $4,124,064 in market value

The first AI stock you'll find in the Oracle of Omaha's hidden portfolio is Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG), 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 (GOOGL) of Alphabet as of the end of June and had a market value north of $4.1 million as of Sept. 1, 2023.

Alphabet is utilizing AI in a variety of ways. Most notably, it's being deployed via Google to further enhance the quality of search results for the world's leading internet search engine. It's also being used on YouTube, the world's second most visited social platform, to remove content that violates its terms of service.

What may not be as visible is that Alphabet is leaning on AI solutions within 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 copious amounts of user data and make predictions as to how they'll respond to variable shifts (e.g., new product introductions, advertising changes, and so on).

Of course, the primary lure for Alphabet remains its world-leading search engine. Since April 2015, Google hasn't accounted for less than 90% of global internet search share. This veritable monopoly in searching makes Alphabet a predictable cash cow.

Taiwan Semiconductor Manufacturing Company: $2,080,467 in market value

A second AI stock you'll find in Warren Buffett's secret portfolio is Taiwan Semiconductor Manufacturing Company(NYSE: TSM), which is more commonly known as "TSMC." New England Asset Management held 22,325 shares of TSMC as of the end of the second quarter.

TSMC serves as the supply-chain backbone of the AI movement. It's the world's leading chip-fabrication company and is currently the key cog that manufactures the graphics processing units (GPUs) used to accelerate the processing speeds of high-compute data centers. Key AI-GPU players, including Nvidia(NASDAQ: NVDA) and Advanced Micro Devices, lean on TSMC for production.

Interestingly enough, Nvidia, which was once a holding within Buffett's secret portfolio, has maxed out sales of its A100 and H100 GPUs due to insufficient chip on wafer on substrate (CoWoS) capacity at TSMC. TSMC is in the process of doubling its CoWoS capacity, which should hopefully alleviate the AI-GPU supply-demand imbalance Nvidia is contending with.

Two jubilant children playing with display iPhones in an Apple store.

Image source: Apple.

Apple: $2,384,165 in market value

The third artificial intelligence stock you'll find in Warren Buffett's $690 million secret portfolio is the least surprising of the bunch: tech stock Apple(NASDAQ: AAPL). Apple is the top holding, by a considerable amount, in the investment portfolio the Oracle of Omaha oversees at Berkshire Hathaway. As of June 30, NEAM held 12,584 shares of Apple.

Although AI has seemingly become a can't-miss trend over the past couple of months, it's been incorporated into Apple's physical products for more than a decade. Apple's introduction of voice-based digital assistant Siri in 2011, along with its constant evolutions of ML via 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 an even more front-and-center example of AI innovation and integration. Vision Pro leans on eye tracking and hand-motion tracking, among other features.

But as I've pointed out on numerous occasions, the lure of Apple tends to be 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 it's generated in excess of $113 billion in operating cash flow over the trailing-12-month period.

NXP Semiconductors: $9,374,714 in market value

A fourth AI stock Warren Buffett's under-the-radar portfolio is invested in is NXP Semiconductors(NASDAQ: NXPI). As of the end of June, NEAM was holding 44,650 shares of NXP, which is worth close to $9.4 million as of Sept. 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 i.MX 95 family of applications processors, which are responsible for, among other things, ensuring that critical safety functions within next-gen vehicles are met.

NXP Semiconductors has processing applications beyond the automotive industry, too. Its ML and deep-learning solutions are used by Internet-of-Things (IoT) applications and within the industrial sector. This can include something as simple as securing a household WiFi connection or ensuring the security of industrial networks.

Whereas a number of AI stocks trade at nosebleed valuations, NXP Semiconductors offers its shareholders a discount forward price-to-earnings (P/E) ratio of just 14.

Broadcom: $13,074,712 in market value

The fifth and final AI stock held by Warren Buffett's $690 million secret portfolio is semiconductor-solutions specialist Broadcom(NASDAQ: AVGO). The 14,985 shares of Broadcom held as of the end of June -- nearly $13 million in market value -- makes it NEAM's largest bet on AI.

Arguably the most exciting AI solution unveiled to date by Broadcom is its Jericho3-AI chip. This networking chip, which was introduced by Broadcom in April, is capable of scaling connectivity to as many as 32,000 high-powered GPUs in AI-accelerated data centers. In short, Jericho3-AI is the middleman of sorts that's tasked with maximizing network utilization and virtually eliminating the potential for traffic congestion.

However, NEAM's investment team likely didn't put the fund's capital to work in Broadcom for Jericho3-AI. Rather, it probably has a lot to do with the 5G revolution. Broadcom generates a sizable percentage of its sales from supplying wireless chips and solutions used in next-generation smartphones. Wireless infrastructure being upgraded to support 5G download speeds has kick-started a device-replacement cycle that should continue through the midpoint of the decade, if not beyond.

Broadcom's backlog is nothing to sneeze at, either. As of July 31, 2022, the company was sitting on a $31 billion backlog. Even though CEO Hock Tan hasn't been as forthcoming with his company's backlog this year, booking orders nearly a year in advance signals that demand for the company's products remains robust.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Berkshire Hathaway, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and NXP Semiconductors. The Motley Fool has a disclosure policy.

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