Is Berkshire Hathaway Stock a Buy After Rocky Results?

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Warren Buffett’s portfolio took a hit. What Morningstar thinks about Berkshire Hathaway. Plus, one of the world’s biggest chipmakers is cutting its quarterly dividend. And, how investors can benefit from the rising popularity of AI-powered chatbots. Research from Morningstar’s team will explain how.

This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Berkshire Hathaway’s Rocky Results

Market volatility rocked the Oracle of Omaha’s portfolio.

Warren Buffett’s Berkshire Hathaway BRK.B reported solid operating revenue that offset unrealized losses from investments. And the results from the company’s latest earnings report lined up with Morningstar’s expectations. But its full-year revenue dropped about a third in 2022. And fourth-quarter revenue also fell due to weaker investment portfolio performance. That includes the gains and losses of the holding company’s investment and derivative portfolios.

Morningstar figures Berkshire entered 2023 with about $94 billion in cash that it could use for investments, acquisitions, or share buybacks. Morningstar doesn’t expect to change its estimate of the shares’ worth and views the stock as undervalued.

Domino’s Trims Outlook

Domino’s DPZ has cut its sales growth and unit-development outlook for the next two to three years. The pizza chain’s lower expectations validate Morningstar’s belief that worsening restaurant profitability and higher construction and financing costs would hurt most of its store operators’ unit development for some time. Domino’s quarterly results were mixed. The company’s almost $1.4 billion in sales was in line with Morningstar’s forecast.

But earnings per share fell slightly short of expectations. Strong cost controls and gradual growth from refranchising dozens of stores should help operating margins in 2023. Inflation and customers’ reluctance to pay higher prices should make this year challenging for restaurant owners. Domino’s carryout business remains its key growth engine. The pizza chain remains Morningstar’s top restaurant-industry pick with an estimated stock worth of $397.

Intel Cuts Quarterly Dividend

Intel INTC is cutting its quarterly dividend by two thirds. Weak demand for personal computers and strong pressure from rival Advanced Micro Devices, or AMD, have hurt the chipmaker. Morningstar supports Intel’s integrated device-manufacturing strategy known as “IDM 2.0.” This dividend cut is necessary given the capital-expenditure requirements of Intel’s turnaround plan. Its dividend yield surpassed 5% before the cut. That would have been tough to maintain. Morningstar estimates at least $20 billion in capital expenditures for Intel this year. The chipmaker’s dividend payouts are better served investing in new technologies and research and development. Intel expects to save billions through the end of 2025 through layoffs, marketing cuts, and temporary salary reductions. These actions could lead to underinvesting in key areas and losing top talent. Morningstar still thinks Intel’s stock is worth $35 and undervalued. However, competitor AMD looks like the better option since it’s expected to perform better despite the softer macroeconomic conditions.

Investing in AI

The popularity of an AI-powered chatbot known as ChatGPT is surging. It’s delivering humanlike responses, and sometimes it makes headlines for them. The chatbot’s arrival also seems to have intensified the clash among two tech titans. You might be wondering how to invest in AI technology. Morningstar’s data journalist Jakir Hossain has talked with Morningstar analysts about that. Jakir is joining Investing Insights.

Hampton: Jakir, OpenAI created ChatGPT. It has potentially kicked off an AR arms race, and this thing has gone viral. Let’s start off with what ChatGPT is and how does it work?

Jakir Hossain: ChatGPT is an artificial intelligent language model, which is just the fancy term to explain that it takes in a lot of data and analyzes that data in order to figure out the relationship between words so that it can understand how to then respond to a user prompt in the most logical and sensical way that it’s capable of. And so with ChatGPT you can ask it a question, and it’ll look back at all the datasets that it’s been trained on, and try to figure out what’s a suitable response to that.

Hampton: Now, Microsoft MSFT has announced that it’s going to invest billions of dollars in OpenAI and then Google followed up and unveiled its own chatbot, Bard AI. What do Morningstar analysts say about how these companies are going to use these chatbots?

Hossain: In my conversation with some of our technology analysts, right now Google and Microsoft are in the center when it comes to artificial intelligence, largely because of Microsoft’s stake in OpenAI and Google developing their own Bard AI, as you mentioned. Both of these are companies I own, and so I’ve been keeping a close eye to see how they’ve been incorporating this technology into their products and services. And right now it’s really just been focused on integrating it with search to try and make that better and then basically make their search engines a lot more competitive and engaging to users.

So for example, Microsoft has released a public beta of sorts, where their search engine, Bing, is now being powered by AI and you can interact with it in the same way that you can with the ChatGPT research platform. Google hasn’t quite yet done the same, but I wouldn’t be surprised if they put that out eventually.

And so the question between these two companies right now is, Is Microsoft going to be able to challenge Google in the search market—because Google dominates that field? Are dynamics going to change? How are they going to change? Those are the big questions that investors are facing when it comes to those two in AI right now.

Hampton: Companies like Salesforce CRM and Adobe ADBE, they’re also using AI. Can you describe how they’re doing it?

Hossain: Similar to Google and Microsoft, Adobe and Salesforce—and Salesforce is another company that I own—they’re mostly using artificial intelligence in order to enhance their existing products and features. And so for example, Adobe has this AI that they call Adobe Sensei, and that’s been weaved into a lot of programs like Adobe Photoshop or Adobe Illustrator. And the purpose behind it is to help users automate some of the more monotonous tasks that they have to do when using programs like Photoshop.

So, for example, for somebody who’s trying to edit a photo, let’s say you wanted to remove something from a digital image because somebody photobombed your picture or something like that, you can remove it, but it’s going to leave a gap there. And so Adobe Sensei can help the editor figure out—it’s basically going to analyze the entire picture and figure out—OK, what’s a suitable color or texture or background to fill this gap up with so that the picture looks natural, and it’s using AI to power that feature.

Likewise, Salesforce has their AI platform, is called Salesforce Einstein, and that’s dedicated to providing users more features that allow them to predict if they’re going to be able to convert a sales lead into a reoccurring customer, figure out what’s the probability of being able to bring a customer, purchase a higher tier of whatever product and service they’re trying to sell, as well as optimize search results for customers to expose them to products that they might be interested in.

Hampton: Artificial intelligence has been around for some time. What are some thoughts within Morningstar about this new phase of AI?

Hossain: In my conversation, we’ve thought that artificial intelligence is something that we’ve actually had for quite some time. Our analysts say that products like Siri, Alexa, and even Google Search, which has to this day, over the last few years really, has been using artificial intelligence to help power its search results. We’ve been using AI in a much more subtle way.

But right now with the release of ChatGPT and the announcement of Bard AI, we’re entering a new era where artificial intelligence is a lot more interactable, in that with ChatGPT, you can type in a response and get a humanlike response back. Users can actually interact with AI in ways that they haven’t been able to with Siri and Alexa to the same degree.

And so it’s exciting, but in talking with our analysts, we think that this is still very much in the first inning. ChatGPT, Bard AI, these things are exciting, but we really think this technology has gotten started. So I think we have a lot left to figure out and see what’s next.

Hampton: Your article suggested investors focus on suppliers than the companies using AI in their products. What do Morningstar analysts say about how to take advantage of AI technology right now?

Hossain: Just to give a bit of background on that: Like I mentioned before, artificial intelligence right now, the focus is figuring out a way for companies to incorporate it in order to enhance their existing products and services. And so our analysts don’t really see a huge revenue opportunity in artificial intelligence just yet because incorporating AI in the case of Adobe Sensei, that may not necessarily be a new stream of revenue for Adobe. It’s going to make their products more compelling and competitive perhaps, but it’s not necessarily going to bring up their sales numbers.

And so right now, the field that they’ve identified as where most of the money for artificial intelligence from an investing standpoint is going is going to be in the semiconductor industry. And that’s because artificial intelligence requires a lot of advanced computing resources and the focus and the primary contributor to that is going to be advanced semiconductors known as graphics processing units, GPUs, or sometimes called graphics cards. And there’s three main companies that produce these, which is Nvidia NVDA, another company that I own, AMD, and Intel. And among those three, Nvidia stands out the most, largely because it is producing graphics cards that are the most competitive for AI workloads and even their latest product offering in the data center in AI space, they release graphics cards under the Hopper Family Architecture. That graphics card is optimized for AI workloads. And so that’s something that companies looking to build up their own AI infrastructure, they’re buying those graphics cards in order to produce that.

AMD and Intel both do offer graphics cards that are capable of helping with AI solutions. But in the case of AMD, although they’ve been competitive with Nvidia for almost two decades, they only just entered the data center and artificial intelligence space about in 2020. And Intel really just entered the graphics card market very recently. I think they only launched their first graphics card last summer.

And so right now, in terms of opportunities even within the semiconductor industry, our analyst sees Nvidia as the top pick for people who think there’s going to be a lot of AI spending because they’re producing the most competitive graphics cards for those workloads.

But that being said, Nvidia is also currently fairly valued. So we do not think that if investors are looking to open a position in Nvidia, right now the stock is just trading just at fair value. And so they might want to wait until it pulls back a little. AMD and Intel on the other hand, are undervalued. And so, although they’re not as exposed to AI workloads, they do benefit from that trend. And so investors might want to look at that as well.

Hampton: All right, Jakir, thank you for joining me on Investing Insights.

Hossain: Thanks for having me.

Hampton: Be sure to check out Jakir’s article, “How to Invest in the Right AI Stocks.”

How IRA Investors Can Avoid the ‘Procrastination Penalty’

Hampton: You could miss out on compounding growth if you make IRA contributions at the last-minute. Here’s Morningstar’s director of personal finance Christine Benz with Vanguard’s Maria Bruno. They talk about how to avoid the so-called “procrastination penalty.”

Christine Benz: Hi. I’m Christine Benz from Morningstar. Some investors rush in their IRA contributions right before the deadline, but that’s not necessarily the right course of action. Joining me to discuss some healthy habits for IRA investing is Maria Bruno. She’s head of U.S. wealth planning research for Vanguard.

Maria, thank you so much for being here.

Maria Bruno: Hi, Christine. Good to be here. Thank you.

Benz: So, let’s talk about this issue of investors waiting until the eleventh hour to make their IRA contributions, getting them in right before the tax-filing deadline. You and I have discussed in the past, Maria, that this is kind of a phenomenon that you see. Is this something that you’re continuing to see this year, for example?

Bruno: We do, Christine, but we’re seeing some really encouraging trends. Again, we’re looking at the 2021 tax year. And what we’re seeing is that more contributions are coming in early in the tax-filing year. So, we’re seeing actually about 20% of contributions come in as early as January, and that’s very encouraging. If we look through to April of that year, it’s about an additional 20% making contributions early. So, that’s quite encouraging.

That said, we are still seeing an incidence of procrastinators, people who are making that contribution toward that April 15 filing deadline. About 35% of contributions are coming in at the back end, and about 15% of those actually are at the April time frame. So, we still have more work to do there, but the trends are highly encouraging.

A couple of other things we’re seeing is that we’re seeing a higher adoption of Roth coming in in that early time frame. So, it seems like Roth contributors are the early-bird contributors, if you will, taking advantage of that tax-free compounding clock. And then, we’re also seeing a higher incidence of investors who are doing multiple contributions throughout that period whether it’s through automatic exchanges or manual contributions.

Benz: You referenced that you’re seeing more people spacing out their contributions throughout the year. It seems like that’s a good development. Is there anything that Vanguard tries to do to encourage that behavior?

Bruno: Christine, the education, first and foremost, is very important for us. The more we can talk about and educate investors around the benefit of investing for retirement early, we take every opportunity to do that. But we also did a few interesting initiatives last year with some really good results. So, for instance, for the 2021 tax season, we tested out a new IRA dashboard during the enrollment process and then also some educational programs, basically just reminding clients to contribute to their IRAs before they lose that opportunity.

And the results were quite interesting and encouraging in that what we found was that clients who received these personal outreaches were actually 17% more likely to contribute. And of these clients that actually did these contributions, we saw a total of about $155 million added to their retirement savings. So, it’s quite exciting and encouraging that we’re actually able to help these investors improve their financial situation.

Another thing that we’re doing right now—granted we’re still in the middle of tax season—but we’re doing more personalized and frequent reminders to investors to take advantage of these retirement savings options. And what we’re seeing is those first-time contributors with Vanguard are actually not only making contributions but making contributions that are 15% higher than those who did not get these personal outreaches. So, what we’re really focusing on here is using data-driven insights to drive better investor outcomes. And the more we can do that, I think the more we can set clients up for investment success, much like our mission and principles employ.

Benz: I wanted to follow up on those stragglers, the people who are rushing in their contributions right before the deadline. Can you talk about the penalty that someone incurs if they’re waiting year after year until the very last minute? At first blush, it doesn’t seem like it should be a big deal. But can you talk about how that can translate into some significant compounding, lost opportunities for compounding over time?

Bruno: I mean, we all realize the sooner you can start the compounding clock, the better, right? But there is—and we’re calling this the procrastination penalty—there’s a cost to waiting, and it doesn’t seem like a big deal when you think about it. But let’s look at a simple example. Let’s assume that we’re looking at someone who’s making their annual IRA contributions, that is $6,500 a year. Let’s say they’re hypothetically investing in a balanced fund, maybe earning a 4% real return. Over 20 years—and again, we’re looking at today’s dollars—over 20 years, that amounts to about a $10,000 difference. Over 30 years, it’s about $18,000. And that’s striking when you’re simply talking about the timing difference, whether you’re making a contribution in January or if you’re making a contribution 15 months later.

Now, this is a very generalized example. I realize that. But even the research that we’ve done that shows the power of early and lump-sum-type investing in capital markets forecasting just shows the value of compounding early. Now, I realize not everyone has the means to be able to make that contribution in January. But even if you were to set this up automatically and break that $6,500 down over that 15-month period, you’re looking at a $400 contribution monthly. So, if you can’t do it all at once, just having that discipline to be able to do it throughout that period is a very good, disciplined way to do that.

Benz: Right. Makes it much more manageable. I wanted to talk about a related issue here, and this is another thing that you flagged in the past is this issue of people get their contribution in, but then they let it sit in cash or something without a lot of earnings potential because maybe they’re not sure where to invest. Can you talk about that dimension of it and what Vanguard sees in terms of what participants do once they get the contribution into the account?

Bruno: This is a good one. And we do see procrastinators who tend to park that money in cash, they tend to be focused more on the act of making that contribution, maybe it’s a check-the-box exercise. And what they’re doing is decoupling that contribution and investment decision. And while many have the best intention to go back and invest that money, they don’t. And we find that it actually sits in cash for months. And there’s a big opportunity cost to remaining uninvested.

Now, it would be great. If you look at plan sponsors’ design and how plan sponsors can default individuals into a target-date fund or a balanced fund, that is a great behavioral tool. But we can’t do that directly with direct investors, but we should, and we should be able to help them avoid some of these pitfalls. And that’s very important for us at Vanguard, and I think there’s a lot that we can do in terms of not only educating our clients but making that online experience, that enrollment process, much more intuitive so that they can actually easily make that contribution and that investment decision all at once. That’s the key to make it easy and intuitive for investors.

Benz: Just to get it done in one fell swoop. And like you, I think that target-date fund is a great idea for an IRA, for people who aren’t sure where to put the money, but they know it’s for their retirement, it seems like a really solid option.

Bruno: Right. Absolutely. And just talking about and educating and personalizing that online experience can really go a long way, I think, in educating investors to do that. And then, they don’t have to go back and do it again. They’re well invested; they’re diversified, low-cost options. It’s a great start.

Benz: Maria, helpful as always. Thank you so much for being here to share your insights.

Bruno: Thank you, Christine. Good to be here.

Benz: Thanks for watching. I’m Christine Benz from Morningstar.

Hampton: Thanks Christine and Maria. Subscribe to Morningstar’s YouTube channel to see new videos about market news, personal finance, and investment picks. Thanks to podcast producer Jake Vankersen. And thank you for tuning into Investing Insights. I’m Ivanna Hampton, a senior multimedia editor at Morningstar. Take care.