Followed by the broad S&P500 Index recently flirting with bear market territory and tech-centric Nasdaq-100 Index already in place, investors are tasked with navigating some rather treacherous waters. But those looking for a guiding star should look no further than legendary investor Warren Buffett, whose Berkshire Hathaway (BRK.A -2.76%)(BRK. B -3.02%) Conglomerate has consistently outperformed the broader market for the last 50+ years.
Three Motley Fool contributors have identified the Berkshire picks that could crush the market if a new tech bull market hits. Therefore, investors should consider buying stocks Amazon (AMZN -5.60%), snowflake (SNOW -8.11%)and Apple (AAPL -3.86%) before that happens.
A leader in more ways than one
Anthony Di Pizio (Amazon): In tough market conditions, owning diverse companies with multiple revenue streams can mean the difference between 35% stock price declines and 80% stock price declines — which is the current reality for many tech stocks. But Amazon offers the added bonus of strong profitability and also the support of Buffett, who has consistently expressed regret that he didn’t buy into the company in its early days. Berkshire finally took the plunge in 2019.
E-commerce continues to gain traction, and in the US alone, Amazon currently accounts for over 40% of all online sales. While that makes up the bulk of the company’s revenue, it’s actually not the most intriguing part of its overall business, which has grown around cloud platform Amazon Web Services (AWS), a booming advertising segment, and even a stake in a burgeoning electric vehicle company.
AWS is a leader in the entire cloud computing industry. It offers hundreds of different products and services to help businesses operate online, whether they need to store data, develop games, or even upgrade their business with advanced machine learning tools. The segment contributed $67.1 billion to Amazon’s trailing-12-month sales, which is 14% of the company’s total $477.7 billion in sales. But it’s the profitability engine behind the entire company, as it generated all of its operating income in the same period — without AWS, Amazon would have been at an operating loss over the past 12 months.
This is the advantage of diverse sources of income. When one part of the organization is underperforming, another part can often fill the gap.
Amazon’s aggressive approach to entering new industries isn’t likely to change anytime soon, having worked so well over the company’s 28-year history. For this reason, investors should take the recent 35% drop in the share price as an opportunity to take a long-term position. It’s never too late to add quality stocks to your portfolio — even Buffett himself is sometimes late to the party.
Berkshire relies on data analysis
Jamie Louko (Snowflake): Buffett is known for owning stable stocks with low volatility, but Snowflake doesn’t fall into that category. Snowflake makes it easier to analyze data stored in different clouds – a migraine-like problem for large companies. It’s a usage-based service where customers only pay when they store and charge data, and as companies create more data this will become a more important service in the future.
Shares are down 66% from their all-time highs, but Snowflake’s business performance continues to climb. For the fiscal first quarter ended April 30, the company reported revenue growth of 85% year over year to $422 million. This was due to the number of customers spending more than $1 million, which rose 98% year over year to 206.
One of the big problems with usage-based businesses is that customers can easily recall their usage in a worrying economic environment. However, Snowflake is in a relatively recession-resistant market as consumers constantly need to analyze data, and that’s not going to change during an economic downturn.
Management anticipates that certain customers will cut spending, but the company stood by its fourth-quarter guidance, suggesting it won’t materially hurt growth.
The company lost $166 million in the first quarter but has more than $3.8 billion in cash and expects to generate over $300 million in adjusted free cash flow for the full fiscal year, both of which subsidize those losses could. With a product that could become more necessary over the long term, Berkshire Hathaway seems to think Snowflake is a great company to own, and you might want to consider following it.
A cash flow machine
Trevor Jennewine (apple): In 2022, Brand Finance once again recognized Apple as the world’s most valuable brand, highlighting the range of trendy electronic devices and the customer loyalty these products inspire. Most notably, Apple dominates the US smartphone space with 50% market share and ranks second globally with 18% market share.
The company certainly makes elegant hardware, but the engine behind its competitive advantage is actually software. Apple’s operating systems like iOS for the iPhone are closed source. That means no third-party hardware vendor can use their software to create a cheaper alternative. If you want the Apple experience, you have to pay for it. That pricing power has made Apple a cash flow machine — free cash flow grew 17% last year to $106 billion.
Additionally, the company is aggressively investing in its services business to more effectively monetize its massive user base. This includes App Store sales, payment services like Apple Card and Apple Pay, and various subscription products like Apple TV+ and Apple Fitness+. These efforts are paying off. In its most recent quarter, total revenue rose 9% to $97.3 billion, but services revenue rose 17% to $19.8 billion. And because Apple’s services business has much higher margins, total gross margin rose 120 basis points to 43.7%.
Investors have many reasons to be happy. Apple recently unveiled new models of the MacBook Air and MacBook Pro, both powered by its proprietary M2 chip, which the company says improves on the M1’s “industry-leading performance-per-watt.” In addition, the company announced Apple Pay Later, a “buy now, pay later” service with no interest or fees. Use Pay Later allows US consumers to make purchases (anywhere that accepts Apple Pay) in four installments over a six-week period.
More broadly, Apple benefits from incredible brand authority, and its burgeoning services business should accelerate profitability over time. For that reason, this stock — which happens to account for 43% of Warren Buffett’s holdings via Berkshire — is a smart buy ahead of the next bull market.