Why Warren Buffett Wouldn’t Touch Nvidia Stock With a 10-Foot Pole | The motley fool

Nvidia (NVDA -1.11%) embodies the promise of AI. The chip maker’s shares have skyrocketed more than 170% so far this year. Why? Artificial intelligence is driving huge demand for the company’s graphics processing units (GPUs).

Many investors wonder if it’s too late to jump on the Nvidia bandwagon. The most famous investor of all, Warren Buffett, is almost certainly not one of them. That’s why Buffett wouldn’t touch Nvidia stock with a 10-foot pole.

Delete the motifs from the list

We can cross a couple of reasons off the list as to why Buffett would shy away from Nvidia. For one thing, it’s not because the legendary investor prefers to steer clear of tech stocks.

Sure, Buffett has said in the past that he only invests in what he understands. As a result, he missed early opportunities to buy tech stocks that became big winners.

However, tech giant Appleranks as the largest holding company by far in Berkshire Hataway‘S (BRK.A 2.24%) (BRK.B 1.97%) wallet. Berkshire also owns several other tech stocks right now, including hpAND Snowflake.

Buffett is also not running away from anything related to AI. Yes, he did raise some concerns about AI at Berkshire’s annual shareholder meeting in May. Buffett said, “When something can do all kinds of things, I worry a little bit because I know we’re not going to be able to uninvent it.” His longtime business partner Charlie Munger also said, “I’m personally skeptical of some of the hype that has gone to artificial intelligence.”

Again, though, Berkshire’s portfolio includes Apple and Amazonia, both have invested heavily in AI development. Many of the companies Buffett holds stakes in are also leaders in using AI, including American Express, MasterCardAND Visa.

Buffett’s highest consideration

So why wouldn’t Buffett want to buy Nvidia shares? It depends on its highest consideration in buying shares. In his 2013 letter to Berkshire Hathaway shareholders, Buffett wrote that he only buys stock that sells for “a reasonable price” relative to his estimated earnings at least five years into the future.

I seriously doubt Buffett would be comfortable estimating what Nvidia’s earnings will be over the next five years. He noted in that 2013 letter to Berkshire shareholders that if he and Munger can’t estimate future earnings, which he added happens often, “they just move on to other perspectives.”

Many investors are questioning Nvidia’s valuation these days. The stock is trading at over 35 times sales and 84 times forward earnings.

Even those who defend Nvidia’s valuation point out why Buffett wouldn’t buy the stock. For example, CNBC’s Jim Cramer recently tweeted:

I know there are people who scoff at Nvidia’s rating. But evaluation is more of an art than many would like. If Nvidia is right, then every major company except Apple depends on it. Everyone. How much is it worth? The argument is daunting. Which makes you humbler

–Jim Cramer (@jimcramer) May 29, 2023

Buffett would probably agree with Cramer that valuing Nvidia is “more of an art than many would like.” It’s almost certainly more of an art than he would like. Buffett also wouldn’t want to depend on Nvidia’s management being right about future demand for its chips.

To be like Buffett?

Should other investors avoid Nvidia because Buffett is doing it? No. Every person’s investment goals and risk tolerance are different.

Buffett lost much of Apple’s big earnings after the introduction of the iPhone. He expressed regret for not buying Amazon sooner. But many investors bought both stocks long before Buffett and made huge gains in doing so.

However, it’s a good idea to follow Buffett’s lead by evaluating future earnings prospects and the valuation of any stock you buy. This may lead some to invest in Nvidia. Others, however, will be like Buffett and won’t want to touch the high-flying AI stock with a 10-foot pole.