Why isn’t Warren Buffett investing in Nvidia?

Nvidiahis (NVDA 0.68%) the stock is up more than 26,000% over the past decade. From fiscal 2014 to fiscal 2024 (which ended in January), the chip maker’s revenue grew at a compound annual growth rate (CAGR) of 31% as its earnings per share (EPS) grew at a CAGR of 50%.

This impressive growth was driven by the rapid expansion of its data centers, which sell next-generation graphics processing units (GPUs) for machine learning and artificial intelligence (AI) tasks, and its steady sales of gaming GPUs, which could also be used. to mine certain cryptocurrencies. It also expanded its automotive chip business and stepped up shipments of Tegra system-on-chips (SoCs) for other devices.

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Nvidia generated stunning market-beating earnings, but one famous investor who missed out on that historic rally was Warren Buffett, who didn’t buy a single share of the chip maker for Berkshire Hathaway (BRK.A -0.45%) (BRK.B -0.50%). Let’s see why the Oracle of Omaha continues to shun one of the best tech stocks on the market.

Nvidia ticks a few boxes for a Buffett investment

Nvidia meets some of Buffett’s well-known criteria for picking stocks. Buffett favors companies with wide moats, and Nvidia is clearly the 800-pound gorilla of the discrete GPU market. According to JPR, it held 88% of the desktop GPU market in the first quarter of 2024, while TechInsights estimates that it controls about 98% of the data center GPU market today.

Buffett also likes companies with a gross margin above 40%, which means he has plenty of pricing power and competitive advantages. Nvidia’s gross margin rose from 59.2% in fiscal 2023 to 73.8% in fiscal 2024 and rose another 13.8 percentage points year-over-year to 78.4% in the first quarter of fiscal 2025 .This rapid expansion has been driven by its unmatched pricing power. core GPU market as more companies upgraded their servers to support more AI applications.

Buffett also wants a company to spend less than 30% of its gross profit on research and development (R&D) because it means it is not aggressively investing in new projects to maintain its competitive edge. Nvidia spent just 20% of its gross profit on its research and development expenses in fiscal 2024, and that ratio dropped to just 13% in the first quarter of fiscal 2025.

Buffett believes that companies should spend less than 30% of their gross profit on their selling, general and administrative (SG&A) expenses because companies with established moats generally do not need to spend much money to attract new customers. For Nvidia, that ratio reached just 6% in fiscal 2024 and 4% in the first quarter of fiscal 2025.

Ultimately, Buffett looks for companies that can maintain a net profit margin of at least 20%. Nvidia reported a net margin of 49% in fiscal 2024 and 57% in the first quarter of fiscal 2025.

So why didn’t Buffett invest in Nvidia?

It’s easy to see why so many investors are still bullish on Nvidia. However, Buffett avoided tech stocks for most of his investing career, saying he preferred evergreen businesses that generated predictable long-term returns. What’s more, Buffett once told investors to “never invest in a business you can’t understand” — and Nvidia’s chip-making business can be difficult to fully analyze without an engineering degree.

Buffett has finally started buying more tech stocks over the past decade, but has mainly invested in mature companies such as IBM, Oracle, HPand Apple. The cloud data storage company Snowflake was the high-growth tech standout in its portfolio.

Buffett has significantly reduced his exposure to the technology sector in recent years. He sold all his IBM shares in 2017, left Oracle in 2019, and recently liquidated all his shares in HP and Snowflake. He even sold half of Berkshire’s massive stake in Apple.

Instead of turning to high-growth tech stocks like many retail investors, Buffett has been hoarding a lot of cash and short-term Treasuries. Berkshire ended its latest quarter with a record $277 billion in cash and cash equivalents — suggesting the conglomerate is bracing for some buying opportunities in a market pullback. This cautious approach isn’t too surprising, as the S&P 500 is nearing its all-time highs and looks expensive at 21 times forward earnings.

Buying Nvidia stock wouldn’t fit that strategy. Its shares aren’t cheap at 47 times forward earnings and 25 times this year’s sales, and Wall Street expectations are skyrocketing as the AI ​​market expands, so any sign of a slowdown could crush Nvidia’s valuations. These are not the steady, predictable returns that Berkshire Hathaway typically seeks.

Should You Follow Warren Buffett’s Lead?

Buffett clearly favors predictable, cash-rich companies in the insurance, banking, rail, utilities and consumer goods sectors. If you want to follow that conservative investment strategy, you may want to avoid Nvidia. But if you think the nascent AI market still has room to grow over the next few decades, then you might still want a small exposure to this hot stock — even if it doesn’t fit Buffett’s criteria for a reliable duration . long term investment.