For more than 50 years, Warren Buffett has been the mastermind responsible for Berkshire Hathaway's (BRK.A -1.14%) (BRK.B -1.07%) incredible gains. Since 1965, Berkshire has delivered an annual average return of 20.3%, which is more than double the 10% compound annual return for the broad-based S&P 500 over the same period. In aggregate, Buffett's company has outperformed the S&P 500 by over 2,700,000%!
Warren Buffett's ability to identify value stocks and to hang onto these brand-name companies for long periods of time has been paramount to his success, and that of Berkshire's shareholders.
Yet, in recent years, we've witnessed a tendency for Buffett and his investment team to lean on growth stocks. Make no mistake about it, Buffett's love of banks and slow-growing consumer staples isn't going away. However, there's been a discernible uptick in fast-growing companies in Berkshire Hathaway's portfolio. Based on Wall Street's projected compound annual growth rate (CAGR) over the next five years (unless otherwise specified), these are Buffett's fastest-growing stocks.
Snowflake: 70.3% CAGR
There's no doubt about it – the fastest-growing company in Buffett's portfolio happens to be cloud data warehousing company Snowflake (SNOW -8.29%), which had its initial public offering less than two weeks ago. Buffett's company bought into Snowflake via a $250 million private placement, and also agreed to acquire a little over 4 million shares from Snowflake's former CEO.
Even though this investment has all the hallmarks of being made by one of Buffett's lieutenants, Todd Combs and Ted Weschler, rather than the Oracle of Omaha himself, there's no denying Snowflake's potential. It's seen the number customers spending at least $1 million more than double from the prior-year period (56 vs. 22), and is expected to grow sales from just shy of $265 million in fiscal 2020 to $3.8 billion by fiscal 2025.
What makes Snowflake so exciting are the many changes it offers from traditional cloud service providers. For example, Snowflake is a pay-as-you-go service that charges based on how much data a company stores and how many Snowflake Compute Credits are used. This transparent cost model should allow its customers to keep their data warehousing costs down.
Snowflake's solutions are also built atop the premier infrastructure-as-a-service (IaaS) providers. Rather than being stuck with a single IaaS service, Snowflake allows its users to easily share cloud-based data across platforms, no matter the IaaS provider.
StoneCo: 34.7% CAGR
If not for the recent purchase of Snowflake shares, the fastest-growing stock in Buffett's portfolio would have been financial technology solutions company StoneCo (STNE -6.71%). According to Wall Street's estimates, StoneCo should be able to grow by an average of almost 35% per year over the next five years.
The key to StoneCo's success is its focus on providing traditional and digital solutions for online and brick-and-mortar retailers in Brazil and throughout other regions of South America. Many of the small businesses in Brazil struggle to have their financial needs met. StoneCo steps in to aid with transaction facilitation, as well as traditional banking. Even during the height of lockdowns for the coronavirus, total payment volume (TPV) traversing StoneCo's network rose by almost 28% during the second quarter from the prior-year period.
The sheer breadth of product offerings for StoneCo is another factor that makes it attractive. The aforementioned banking services were introduced less than a year ago, yet the company claimed 285,000 accounts, as of July, with monthly revenue from digital banking more than tripling in July from the sequential month of June.
Over the long run, Brazil represents a delectable growth opportunity for StoneCo.
Amazon: 18.4% CAGR
It's arguably no surprise to find Amazon (AMZN -8.43%) on a list of the fastest-growing stocks. The thing to understand here is that Amazon wasn't a Buffett buy, but was instead added by either Combs or Weschler during the first quarter of 2019.
As you're probably aware, Amazon's big-time revenue generator is the company's marketplace. Based on estimates from Bank of America/Merrill Lynch, Amazon controls 44% of all online sales in the United States. Even though this is a generally low-margin category, Amazon is highly successful at keeping consumers loyal to its brand via Prime memberships and its enviable logistics system.
However, it's not retail that has the hamster running at a lightning-quick pace on its wheel for Amazon. The company's real growth driver is cloud infrastructure segment, Amazon Web Services (AWS). During the coronavirus-challenged second quarter, AWS delivered 29% growth from the prior-year period, and is now pacing more than $43 billion in full-year sales on an extrapolated basis. Since cloud margins leave retail margins in the dust, Amazon's cash flow explosion is going to be entirely dependent on AWS' continued success.
Mastercard: 11.1% CAGR
Keeping with the theme that megacap companies can grow at a fast pace, too, payment facilitator Mastercard (MA -0.28%) slides in as Warren Buffett's fourth-fastest growing stock. Based on Wall Street's forecast, Mastercard has the ability to grow revenue by an average of 11% per year through 2024.
One important thing to note is that Mastercard is purely a payment facilitator and not a lender. While some of its peers do lend, and are therefore able to double-up their income streams via interest income during periods of economic expansion, this also exposes these lenders to loan delinquencies during periods of recession. Since Mastercard doesn't lend, it's not directly impacted when the U.S. economic cycle invariably turns lower. This is why its profit margin has consistently been 40% or higher on trailing 12-month basis.
Mastercard also has a huge multi-decade growth opportunity ahead of it in emerging markets. Though the U.S. should remain a core profit generator for the company, there are multiple regions around the world where cash still dominates transactions. Presumably, this gives Mastercard the ability to expand its reach to southeastern Asia, Africa, and the Middle East to sustain its double-digit growth rate.
Visa: 8.5% CAGR (four-year)
Perhaps it's only fitting that the fifth-fastest-growing stock Warren Buffett owns is Mastercard's biggest rival, Visa (V 0.25%). Based on estimates that only extend through 2023, Visa should deliver annual growth of 8.5% per year.
The ownership thesis for Visa is very similar to that of Mastercard. Like its competitor, Visa isn't a lender, and is therefore not directly exposed to rising credit delinquencies during periods of economic turmoil. But unlike Mastercard, it's the clear-cut dominant player in the United States. In 2018, it held more than a 53% share of credit card network purchase volume, which is more than double the close to 23% share that Mastercard held. That's important, because the U.S. is the gross domestic product (GDP) leader of the world, and its GDP is dependent on consumption.
Similar to Mastercard, Visa also has an intriguing growth opportunity beyond the United States. Visa acquired Visa Europe in 2016, giving it greater access to the Eurozone. However, it's the emerging market regions of Africa, the Middle East, and southeastern Asia that offer Visa its greatest long-term growth opportunity.