Nvidia ‘s ( NVDA 1.22% ) The stock has surged by over 26,000% in the last ten years. Between fiscal 2014 and fiscal 2024 (ending this January), the chipmaker’s revenue increased at a average yearly growth rate a compound annual growth rate (CAGR) of 31% while its earnings per share (EPS) increased at a CAGR of 50%.
The remarkable increase was fueled by the swift growth of its data center division, which offers advanced graphics processing units (GPUs) for machine learning and tasks related to artificial intelligence (AI) , and the consistent sales of its gaming graphics processing units (GPUs), which could be utilized for mining specific cryptocurrencies. Additionally, it grew its automotive chip division and increased the distribution of its Tegra system-on-chips (SoCs) for various other devices.
Photo credit: Getty Images.
Nvidia achieved impressive gains that outperformed the market, but Warren Buffett, a well-known investor, did not participate in that remarkable surge, as he did not purchase any shares of the chip company. Berkshire Hathaway is a diversified holding company led by Warren Buffett, known for owning a wide range of businesses and investments. ( BRK.A -0.48% ) ( BRK.B -0.52% ) Let’s explore the reasons why the Oracle of Omaha continues to steer clear of one of the most popular tech stocks in the market.
Nvidia meets several criteria for a Buffett-style investment.
Nvidia meets several of Buffett’s famous stock selection criteria. Buffett prefers businesses with strong competitive advantages, and Nvidia is undoubtedly the dominant player in the discrete GPU sector. In the first quarter of 2024, it captured 88% of the desktop GPU market according to JPR. Meanwhile, TechInsights estimates that Nvidia currently holds approximately 98% of the data center GPU market.
Buffett prefers companies that have a gross margin exceeding 40%, indicating they possess significant pricing power and competitive strengths. Nvidia’s gross margin increased from 59.2% in fiscal year 2023 to 73.8% in fiscal year 2024. It further climbed by 13.8 percentage points compared to the previous year, reaching 78.4% in the first quarter of fiscal year 2025. This swift growth was fueled by the company’s unparalleled pricing power in the data center GPU sector, as more businesses upgraded their servers to accommodate additional AI applications.
Buffett prefers a company to allocate less than 30% of its gross profits to research and development (R&D) because it indicates the company isn’t overly investing in new projects to sustain its competitive edge. Nvidia allocated only 20% of its gross profit to R&D in fiscal 2024, and this percentage decreased to just 13% in the first quarter of fiscal 2025.
Buffett suggests that businesses should allocate less than 30% of their gross profits to sales, general, and administrative (SG&A) expenses, as companies with strong competitive advantages typically don’t need to invest heavily to gain new customers. In the case of Nvidia, this percentage was only 6% in fiscal year 2024 and dropped to 4% in the first quarter of fiscal year 2025.
Finally, Buffett seeks out companies that can sustain a net profit margin of 20% or more. Nvidia announced a net margin of 49% for fiscal year 2024 and 57% for the first quarter of fiscal year 2025.
Why hasn’t Buffett chosen to invest in Nvidia?
It’s clear why numerous investors remain optimistic about Nvidia. Yet, Buffett, known for steering clear of tech stocks for most of his investing career, favored businesses with consistent, long-term returns. He also advised investors to “never invest in a business you cannot understand,” and Nvidia’s chip manufacturing can be complex to fully comprehend without a background in engineering.
Over the past ten years, Buffett began increasing his investments in technology stocks, focusing primarily on well-established, blue-chip firms such as IBM , Oracle , HP , and Apple The company specializing in cloud-based data storage solutions Snowflake was the rapidly expanding tech highlight in his investment collection.
Over the past few years, Buffett has significantly cut back his investments in the tech industry. In 2017, he sold all his IBM shares, followed by exiting Oracle in 2019. More recently, he sold all his shares in HP and Snowflake. Additionally, he reduced Berkshire’s substantial holdings in Apple by half.
Rather than gravitating towards high-growth tech stocks like numerous retail investors, Buffett has been accumulating a significant amount of cash and short-term Treasury securities. Berkshire concluded its latest quarter With an unprecedented $277 billion in cash and equivalents, it appears the conglomerate is preparing for potential buying opportunities during a market downturn. This careful strategy is not unexpected, given that the S&P 500 is close to its highest levels ever and seems costly at 21 times projected earnings.
Purchasing Nvidia’s stock would not align with that strategy. The stock is expensive, trading at 47 times its future earnings and 25 times this year’s sales. As the AI market grows, Wall Street’s expectations for Nvidia are extremely high, which means any sign of a slowdown could severely impact its valuations. These are not the stable and consistent returns that Berkshire Hathaway typically seeks.
Is it advisable to emulate Warren Buffett’s approach?
Buffett clearly prioritizes companies with predictable and substantial cash flow in sectors like insurance, banking, railroads, utilities, and consumer staples. If you’re inclined to adopt this cautious investment approach, you might consider steering clear of Nvidia. However, if you think the emerging AI market has the potential for significant growth in the coming decades, you might still consider investing in this highly sought-after stock, even if it doesn’t align with Buffett’s standards for a reliable long-term investment.
