3 Reasons Why Nvidia Fits Warren Buffett's Investment Style

While Warren Buffett and Berkshire Hathaway have never owned Nvidia (NASDAQ: NVDA), the chipmaker actually fits the investment profile of the stocks he loves to own. The semiconductor stock has a wide moat with a durable, compounding business model that is trading at an attractive valuation.

Let's dig deeper into why Nvidia should be considered a Buffett-style investment.

Image source: Getty Images

A wide moat

Nvidia didn't stumble into becoming the king of artificial intelligence (AI) infrastructure by accident. It was a carefully orchestrated plan that took many years to pay off, but it resulted in a wide moat in the space.

It all started with its CUDA software platform, which the company created to let developers program its powerful graphics processing units (GPUs) for tasks outside of their original purpose of speeding up graphics rendering in video games. Nvidia then took CUDA and planted it into universities and research labs that were doing early work on AI. That resulted in an entire generation of AI engineers trained on its software platform and most foundational AI code written using its software and optimized for its chips.

Those moves formed the wide moat that Nvidia sees in AI infrastructure today, particularly with regard to large language model (LLM) training.

However, the company did not stop there, designing a whole AI infrastructure ecosystem around CUDA and its GPUs. It developed its proprietary NVLink interconnect technology to help its chips act as a single unit, further widening its moat, and in 2020 it acquired next-gen networking company Mellanox, whose technology was arguably ahead of its time. Earlier this year, Nvidia "acquired" Groq to bring its language processing unit (LPU) technology into the CUDA ecosystem, putting Nvidia at the forefront of the fast-growing inference market.

Nvidia has also made other smart moves to make sure its moat remains intact. It locked in $500 billion worth of supply constrained high-bandwidth memory (HBM), which is needed to optimize AI chips, and it also acquired important open-source AI systems in SchedMD and HuggingFace to move into the critical software layers used to orchestrate and distribute AI.

In the span of two decades, Nvidia has gone from a video game chipmaker to a complete end-to-end infrastructure player with a wide and perhaps growing moat.

A durable business model

Warren Buffett championed Berkshire's investment in Alphabet and gave the go-ahead to invest an additional $10 billion in a private placement to help the company build out the AI infrastructure for its cloud computing unit. As such, he clearly believes in cloud computing economics.

When using Nvidia chips, cloud providers have typically been getting paybacks within two to three years, while the chips tend to have economic life spans of five to six years. That gives Nvidia a visible replacement cycle that is pretty similar to Buffett's top holding, Apple, with its iPhones and computers.

Meanwhile, the great thing about AI versus past huge tech trends, like the internet and smartphones, is that its demand can essentially be limitless if it continues to provide a strong economic payback, not bound by human consumption. Combined with a well-defined replacement cycle, Nvidia should have a strong compounding business even when the AI frenzy starts to calm down.

An attractive valuation

Even with great businesses, Buffett isn't willing to pay any price. He wants to buy stocks when they are trading below their intrinsic value, and Nvidia can certainly make that argument.

The stock trades at a forward P/E of 24 times fiscal 2027 (ending January 2027) and just above 14 times the fiscal 2028 consensus. This is for a company with about 75% gross margins that grew its revenue by more than 100% last quarter and projected that it would increase its revenue by around 70% next fiscal year.

While revenue growth will eventually slow, Nvidia is a stock worth a lot more than it is currently valued.

Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.