Warren Buffett is one the most successful investors in history. In 1965, he took over Berkshire Hathaway, a holding company that operates across a range of industries, including insurance, railroads, and energy. While it wholly owns several diverse companies, most of Berkshire's GAAP profits come from its equity portfolio. To that end, Buffett's knack for picking stocks has helped Berkshire's share price grow at an annualized rate of 20.1% since 1965. That's nearly double the 10.5% annualized return generated by the S&P 500.
While any business that Buffett likes is worth consideration, there are two, in particular, that stand out from the crowd: Amazon (AMZN -1.64%) and Snowflake (SNOW 2.53%). Both businesses play into major secular trends, but due to recent market volatility, shares of Amazon and Snowflake have fallen 20% and 44%, respectively, from their highs. That creates a buying opportunity for long-term investors.
Here's what you should know about these two top Buffett stocks.
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1. Snowflake
Enterprises consist of many different departments (e.g. marketing, finance, human resources). And all of those departments rely on different software, which means data is regularly created and stored across multiple systems. That complexity is problematic, as it leads to data silos with limited cross-department accessibility. That's where Snowflake can help.
Its platform -- the Data Cloud -- breaks those barriers, allowing enterprises to integrate and analyze siloed data sets. Clients can harness that power to make informed business decisions, build data-driven applications, and securely share data with partners, all without worrying about the underlying infrastructure. Better yet, Snowflake is cloud-agnostic, meaning it runs across all three major public clouds: Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud.
If you're not convinced of Snowflake's competitive strength, just take a look at its financial performance. In fiscal 2022 (ended Jan. 31, 2022), its customer base grew 44% to 5,944, and the average customer spent 78%, evidencing the value of the Data Cloud. As a result, revenue skyrocketed 106% to $1.2 billion, and free cash flow came in at $81.2 million, marking the first time Snowflake has generated positive free cash flow on a full-year basis.
In the past year, Snowflake continued to roll out new features and products. For instance, "Powered by Snowflake" is a program that helps developers build, market, and run applications in the Data Cloud. Early partners include Adobe and Instacart. Similarly, Snowflake continued to grow its industry-specific solutions with the launch of the Media Data Cloud in October, a platform that helps clients like Roku and The Trade Desk share data and insights with advertisers.
Looking ahead, the bull case for Snowflake is straightforward: Enterprises generate lots of data, and the ones that can convert that data into actionable insights and powerful applications will thrive. Snowflake makes that possible. To that end, management puts its market opportunity at $90 billion. And while the stock certainly isn't cheap at 64 times sales, it is cheaper than it's ever been before. That's why now looks like a good time to start building a position in this disruptive tech company.
2. Amazon
In 2021, Amazon powered 41% of U.S. e-commerce sales, and the secret to that success harkens back to its earliest days. Rather than worrying about the competition, then-CEO Jeff Bezos chose to focus on customer satisfaction. That guiding principle helped him grow the company from an online bookstore (that operated out of his garage) into the world's most visited online marketplace, supported by a logistics network that now delivers more packages than FedEx each year.
Amazon has also shown a flair for innovation. In 2006, the launch of Amazon Web Services (AWS) positioned the company as a first-mover in the nascent cloud computing industry. Microsoft Azure wasn't generally available until 2010. And Amazon has parlayed that edge into a substantial competitive advantage. Research company Gartner recently recognized AWS as the leading provider of cloud infrastructure and platform services, citing a better ability to execute and a stronger growth strategy. Better yet, AWS captured a 33% market share in 2021, up from 32% in 2020.
Despite supply chain headwinds, Amazon still managed to deliver an impressive financial performance over the past year. Revenue rose 22% to $469.8 billion, powered by accelerating sales growth from AWS, and GAAP earnings jumped 55% to $64.78 per diluted share. More importantly, Amazon is well-positioned to maintain that momentum.
In addition to its strength in e-commerce and cloud computing, the company is rapidly gaining ground in the digital advertising market, thanks to the popularity of its online marketplace, as well other content platforms like Amazon Fire TV and Twitch. Last year, the company took 11.6% of U.S. digital ad spend, but eMarketer believes that figure will reach 14.6% by 2023. In short, Amazon is a titan in several high-growth industries, and the company is still expanding into new markets. That's why this stock belongs in your portfolio.
