Beyond the Hype: 3 AI Stocks Even Warren Buffett Might Approve Of
Contrary to popular belief, investing in the artificial intelligence boom doesn’t necessarily require embracing high-risk, volatile stocks. A growing number of analysts suggest that several AI-focused companies possess the hallmarks Warren Buffett typically seeks: predictability, profitability, and a clear path to sustained growth.
Buffett has long expressed skepticism towards technology stocks, famously stating they are often “too difficult to understand” and prone to rapid change. He consistently favors established, profitable businesses with simple models – a preference that historically disqualifies many AI ventures from consideration for Berkshire Hathaway’s portfolio. However, not all technology companies fit the mold of the speculative dot-com era investments Buffett has avoided.
Here’s a closer look at three AI prospects that demonstrate the characteristics Buffett values, and could potentially find a place in a value-focused portfolio.
Arm Holdings: The Quiet Power Behind the Tech
Arm Holdings (ARM -2.62%) may not boast perfectly predictable quarterly results, but its revenue and earnings consistently demonstrate reliable growth and increasing profitability.
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Often categorized as a semiconductor stock, Arm distinguishes itself from manufacturers like Intel (INTC -2.35%) and Qualcomm. Instead of producing chips directly, Arm designs the underlying microchip architecture and licenses this intellectual property to manufacturers, who then outsource production to companies like Taiwan Semiconductor Manufacturing (TSM -2.59%). Apple’s (AAPL -2.51%) latest iPhone processors, for example, are built on Arm’s architecture but fabricated by TSMC.
This licensing model generates high-margin revenue with minimal production or distribution costs. Last fiscal year, Arm Holdings converted $4 billion in sales into nearly $800 million in net income. Despite the technological capabilities of companies like Intel, Apple, and Qualcomm, they rely on – and compensate – Arm for its chip designs due to patented know-how and superior power efficiency.
According to company projections, Arm could control as much as half of the data center processor market by the end of this year, a significant increase from its 15% share in 2024. This growth is driven by the fact that its cloud-computing data center processors require up to 60% less electricity than competing processors, addressing a critical concern for data center operators.
Taiwan Semiconductor: The Engine of the Chip Industry
Taiwan Semiconductor Manufacturing doesn’t just produce chips for Apple’s iPhones; it manufactures high-performance processors for industry giants including Nvidia, Qualcomm, Advanced Micro Devices, and Broadcom. Analysts estimate TSMC commands between 80% and 90% of the global market share for high-performance processor production.
The complexity and expense of processor manufacturing often lead companies to outsource this function to specialized firms like TSMC, which possesses the necessary experience, expertise, and capacity. This aligns with Buffett’s investment philosophy, which emphasizes identifying “proven, high-quality companies with a wide competitive moat.” TSMC demonstrably offers both.
While some chipmakers, like Intel, have attempted to reduce their reliance on TSMC by establishing their own foundries in Europe and the U.S., delays and scaling back of these initiatives highlight the challenges of competing with TSMC’s established technological lead. Apple’s approach – partnering with TSMC to establish a U.S. manufacturing presence – reflects a more pragmatic strategy.
Ultimately, the demand for advanced computer chips is constant, making TSMC a fundamentally sound long-term investment for Buffett-minded investors.
DigitalOcean: The Cloud Provider with AI Potential
Finally, DigitalOcean (Docn -7.39%) deserves consideration as an undervalued and profitable AI stock that could appeal to Warren Buffett.
It’s arguably the least recognized of the three companies discussed, with a market capitalization of under $3 billion. While not as directly involved in the AI industry as Arm or TSMC, DigitalOcean is increasingly benefiting from the growth of AI.
DigitalOcean provides cloud-based services – including blockchain solutions, web hosting, video streaming, and online gaming platforms – and a growing suite of AI solutions like AI training, virtual customer service, and automated coding. What truly sets DigitalOcean apart is its business model and consistent profitability.
Clients pay for access to DigitalOcean’s technological solutions on a predictable, monthly basis. As of the first quarter of this year, the company’s annualized recurring revenue run rate stood at $843 million, a 14% increase year-over-year, generating $84 million in net income on $781 million in total revenue for 2024.
As long as the demand for cloud services – and cloud-based AI solutions – continues to grow, DigitalOcean’s revenue and earnings are poised to follow suit, making it a compelling option for investors seeking a Buffett-esque approach to the AI revolution.
