Imitation is the sincerest form of flattery, as the expression goes. When it comes to finding the best stocks, there are few investors better to imitate than Warren Buffett. From 1965 to 2020, his Berkshire Hathaway has seen its stock compound at a 20% annual rate. By comparison, the S&P 500 has had an annualized return of 10% over that same time frame. To put it another way, $10,000 invested in Berkshire in 1965 would be worth over $735 million today.
Unfortunately, achieving similar returns is not as simple as buying the same stocks Warren Buffett owns. However, sifting through the Berkshire stock portfolio is a good place to get ideas. Here are my three top stocks owned by Warren Buffett that I think will reward investors who buy now and hold for the long haul.
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Apple
There's no extra points for originality in investing. Considering that Apple (AAPL -1.22%) is Buffett's largest holding by far, I'm not exactly going out on a limb by placing it at the top of my list of Buffett stocks to buy. Despite being one of the largest companies in the world, Apple is still growing at an impressive rate. Total sales grew 11% in the first quarter of 2022, with every category other than iPad and iPhone growing double digits. It's clear that demand for Apple's hardware devices remains strong.
When consumers think about Apple, what comes to mind is likely the company's popular devices like the iPhone, iPad, and Apple Watch. Investors, on the other hand, should keep an eye on Apple's services business. One of Apple's strengths is the ecosystem its users enter once they start purchasing Apple products. This often leads to subscriptions for things like cloud storage, Apple Music, and App Store purchases. In Q1, the services segment grew 24% year over year and now comprises 16% of sales. These sales are high margin and help Apple sustain its strong profitability.
Apple is also still innovating. It now manufactures its own chips, is rumored to be developing augmented reality/virtual reality glasses, and has been tied to various efforts in the automotive space. Time will tell if these efforts end up leading to new products, but Apple has an impressive track record of bringing exciting innovations to market.
Amazon
As the world's largest e-commerce company, Amazon is no stranger to consumers. It ended 2021 with $470 billion in revenue, up 22% over 2020. The fact that Amazon, much like Apple, is able to achieve that much growth at a market cap north of $1.6 trillion is truly impressive.
Within that revenue growth is what is becoming an increasingly important part of Amazon's success, its Amazon Web Services (AWS) cloud infrastructure business. When the company first started reporting AWS as a separate business segment in 2015, it only comprised 7% of total revenue. Fast forward to 2021 and AWS has increased to 13% of total revenues, an 85% increase over that time frame.
Amazon is currently the leader in the cloud space, a market that grew at a compound annual rate of 13% over the past five years. Investors who buy and hold Amazon shares should benefit from this secular growth trend for many years to come, all while benefiting from Amazon's leading e-commerce business as well.
Snowflake
When Berkshire Hathaway added Snowflake (SNOW -1.99%) to its portfolio in late 2020, it came as a surprise to many investors, considering Buffett's track record of investing in insurance and industrials. However, the performance of this cloud data company would make any investor pay attention. In its latest fiscal year (ended January 31, 2022), Snowflake grew revenue and gross profit by 106% and 118%, respectively, and posted a net loss per share of $2.26, compared to a loss of $3.81 in 2021.
The details of the business's growth are even more impressive. Total customers increased by 44% in 2022, and Snowflake's net revenue retention rate was 178%. That means that existing customers spent 78% more in 2022 than they did in the prior year. Additionally, customers who spent more than $1 million grew 139% in 2022. The important takeaway is that the vast majority of Snowflake's new customers are the "big fish" that will spend more initially and also in future years.
Snowflake has had a volatile ride in its short time as a public company, with its share price ranging from a high of $401 to a low of $167. At the time of this writing, Snowflake trades for $234, which equates to a price-to-sales multiple of 58. That is a very expensive stock, but it's also near the least expensive it's ever been. Snowflake estimates its total addressable market to be approximately $81 billion. Assuming that's even remotely accurate, the current valuation may be worth it if the stock is held for the long haul.
