Please ensure Javascript is enabled for purposes of website accessibility

1 Lesson Investors Can Learn From These 2 Warren Buffett Stocks

By Trevor Jennewine - May 6, 2021 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Warren Buffet has been investing longer than most people have been alive.

It's easy to look at a company like Amazon (AMZN -2.86%) or Apple (AAPL -1.51%) and assume it's too late to invest, or that these "big tech" companies are too big to beat the market. But that's simply not true. Sure, big companies tend to grow more slowly, but Amazon and Apple have outperformed the S&P 500 over the last one, five, and ten years.

Notably, Warren Buffett owns both of these tech stocks, and he certainly wasn't an early investor in either case. In fact, Buffett didn't buy Apple or Amazon until 2016 and 2019, respectively. There's a valuable lesson here: It's typically worth owning stock in great companies regardless of how big they've become, because they can always get bigger. Here what investors should know about these two giants.

Blackboard featuring various bar graphs and pie graphs beside a lit lightbulb.

Image source: Getty Images

Amazon: The retail titan

Amazon is the second-largest retailer in the world, and the largest e-commerce marketplace in the United States -- but that hasn't stopped its commerce business from growing. In fact, Amazon is still gaining market share.

U.S. E-Commerce Sales

2019

2020

2021*

Amazon Market Share

37.3%

39.8%

40.4%

Data source: eMarketer. Note: 2021 figure is an estimate.

During the most recent quarter, Amazon reported jaw-dropping revenue growth of 44% as sales hit $108.5 billion. Even more impressive, earnings jumped 215% to reach $15.79 per diluted share.

Amazon's retail business showed strength in the North America and international segments, as top-line growth accelerated and operating margins expanded in both regions. This was driven by a 44% increase in units sold, highlighting one of the company's many advantages: efficient scale.

Amazon has built a trusted marketplace, with a network of consumers, merchants, employees, and logistics infrastructure around the globe. This creates a cost advantage known as economies of scale, meaning the company's operating expenses per unit decrease as unit volume increases. That powerful dynamic gives Amazon a considerable edge over smaller rivals.

In cloud computing, Amazon Web Services (AWS) also delivered a strong quarter. Revenue popped 32%, an acceleration over the 28% growth last quarter. Jeff Bezos explained the company's strength in this segment, saying: "[AWS offers] what is by far the broadest set of tools and services available, and we continue to invent relentlessly."

That's a big advantage, and it has made AWS the most widely adopted cloud platform around the world. For instance, Walt Disney relies on Amazon's cloud to deliver streaming content from Disney+ to over 100 million global viewers.

Going forward, Amazon still has plenty of room to grow. E-commerce and cloud computing should continue to gain traction with consumers and enterprises, and Amazon is gaining market share in digital advertising, which represents a $191 billion opportunity, according to eMarketer. That's why this stock is still worth buying.

Apple: The consumer electronics giant

Apple is the world's largest publicly traded company, with a market cap of $2.2 trillion. It's also Warren Buffett's largest holding, representing nearly 44% of his portfolio. Put another way, Buffet has over $117 billion invested in this tech company.

Red Apple iPhone 12 and Apple Watch series 6 against a red background.

Image source: Apple

Despite a global semiconductor shortage, Apple just delivered impressive earnings. Revenue jumped 54% to $89.6 billion in the second quarter, and earnings surged to $1.40 per diluted share, up 119%. These results were driven by high demand for multiple hardware products. Most notably, iPhone sales popped 66%, while Mac and iPad revenue surged 70% and 79%, respectively.

That performance underscores the value in Apple's brand name. Consumers love Apple hardware. In fact, customer satisfaction was over 99% for the iPhone 12, 94% for the iPad, and 91% for the Mac in a recent survey by 451 Research. Happy customers buy more products.

But there's another piece of the puzzle. Apple's ability to command premium prices is further strengthened by its iOS operating system. Unlike Android, Apple's iOS is closed-source software, meaning no rival can use it to build a cheaper (but similar) tablet or phone. Put simply, if you want the Apple experience, you have to be willing to pay for Apple hardware.

Beyond its valuable brand name, Apple's history of innovation is another important advantage. The Cupertino company struck it big with the first iPod in 2001 , then single-handedly sparked the smartphone revolution with the first iPhone in 2007. Apple also popularized the tablet with the first iPad in 2010 -- something Microsoft failed to do despite designing a prototype Tablet PC in 2000.

So here's the question: Does Apple have another revolutionary product up its sleeve? I think the answer is yes, but I don't think it's just one product. Specifically, Apple's portfolio of services -- including subscription offerings like Apple TV+, Apple News+, and Apple Music, as well as App Store fees -- allows the company to further monetize its massive user base.

In the most recent quarter, services revenue jumped 27%, marking an acceleration over the 16% growth in both 2019 and 2020. More to the point, services gross margin was 70% in Q2, nearly double the 36% gross margin on Apple's hardware. In other words, as Apple's services business grows, it should drive profitability. That's why this stock is still worth owning.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, and Walt Disney. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon, long March 2023 $120.0 calls on Apple, short January 2022 $1940.0 calls on Amazon, and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$171.52 (-1.51%) $-2.63
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$138.23 (-2.86%) $-4.07
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$120.14 (-2.06%) $-2.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
397%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.