Unanticipated Artificial Intelligence Shares Held by Warren Buffett's Berkshire Hathaway
When you mention names like Berkshire Hathaway (BRK.A 1.37%), BRK.B 0.86%) and Warren Buffett, it's unlikely that AI investment pops into your mind first. However, a closer look at their stock portfolio reveals some exposure to the AI trend. This exposure is primarily due to the companies they invest in embracing AI, rather than Berkshire or Buffett actively pursuing AI-focused companies.
Investors should take notice when a renowned investment firm like Berkshire steps into a company. So, which AI-involved company has managed to catch Berkshire's attention? Apple (AAPL 1.88%) is a plausible guess, and while it may be accurate, I'm more inclined towards Amazon (AMZN 0.73%).
Berkshire's Amazon venture has been successful
Berkshire owns a share of Amazon stock, although it accounts for a small portion of its total portfolio. Berkshire holds 10 million Amazon shares, valued at approximately $2 billion. Despite this substantial amount, it represents only 0.7% of Berkshire's overall portfolio. While this isn't a negligible amount, it doesn't significantly influence Berkshire's investment returns either.
Moreover, there's uncertainty about Buffett himself making this purchase. Despite being the CEO, Buffett's associates, Ted Weschler and Todd Combs, enjoy some investment autonomy. They have been known to invest in less conventional stocks like Amazon, granting them the liberty to make unconventional purchases.
If Berkshire had known the outcomes of the Amazon investment, they would have undoubtedly purchased more shares.
Berkshire initially invested in Amazon in Q1 2019 with the stock trading at approximately $83 per share. The current price of around $200 per share represents a 141% return on investment.
However, the majority of this return has surfaced in recent times, as Amazon's AI affiliation starts to show its influence.
AWS is essential to the AI investment strategy
Although AI permeates every aspect of Amazon's business, its primary connection to AI stems from its cloud computing division, Amazon Web Services (AWS). AWS is the leader in cloud computing and has seen a recent surge in growth due to surging AI demand.
Cloud computing is a vital part of AI infrastructure, as it allows companies to rent computing power and storage space rather than purchasing an expensive server. This flexibility enables companies to scale quickly or adjust computing power according to the workload at hand. Furthermore, Amazon has collaborated with AI leader Anthropic to equip AWS clients with the necessary tools to incorporate generative AI into their workflows and systems.
This revival of AWS's growth resulted in a 19% year-over-year increase in revenue in Q3, reaching $27.5 billion. Profitability also saw an uptick, with its operating income rising by 50% to $10.4 billion, indicating a formidable 38% operating margin.
AWS plays a significant role in Amazon's profitability. It accounted for 60% of Amazon's operating profits, despite contributing to only 17% of total sales. This is a significant driver for Amazon's business, and if the rapid growth continues, so too will Amazon's stock price.
Thanks to AI, Amazon is dominating the cloud computing market, but this success has injected high expectations into the stock.
The stock isn't cheap, trading at 34 times 2025 earnings.
However, considering the AI tailwinds and improving profitability across all Amazon divisions, Amazon remains in its buying zone. I believe Amazon can surpass market expectations in the future, but for this to happen, AWS's growth needs to hold up for an extended period. The odds of this are high, making Amazon an attractive investment opportunity at present.
Following Berkshire Hathaway's investment in Amazon, the question arises about the role of finance and investing in their decision. Berkshire's significant investment in Amazon, worth around $2 billion, signifies their belief in the company's potential, particularly its AI-focused ventures like Amazon Web Services (AWS).
Given Berkshire's habit of investing in companies that embrace AI, the success of AWS is crucial for the company's overall performance. The surge in AWS revenue, up 19% year-over-year, and its substantial contribution to Amazon's profitability, accounting for 60% of operating profits, underscores AWS's importance in Berkshire's investment strategy and their belief in the AI trend.
