With the broadly followed S&P 500 index recently flirting with bear market territory, and the tech-centric Nasdaq-100 index already there, investors are tasked with navigating some pretty treacherous waters. But those searching for a guiding light should look no further than legendary investor Warren Buffett, whose Berkshire Hathaway (BRK.A 0.34%)(BRK.B 0.27%) conglomerate has consistently outperformed the broader market over the last 50-plus years.
Three Motley Fool contributors have identified the Berkshire picks that could crush the market when a new tech bull wave kicks off. Here's why investors should consider buying shares in Amazon (AMZN 2.61%), Snowflake (SNOW +1.61%), and Apple (AAPL 0.96%) before that happens.
Image source: The Motley Fool.
A leader in more ways than one
Anthony Di Pizio (Amazon): In difficult market conditions, owning diverse companies with multiple revenue streams can be the difference between share price declines of 35% and share price declines of 80% -- which is the reality for many tech stocks right now. But Amazon offers the added bonus of strong profitability, and also the endorsement of Buffett, who has consistently expressed his regret for not buying into the company during its early days. Berkshire did finally take the leap in 2019.
E-commerce continues to gain traction, and in the U.S. Amazon alone is currently responsible for over 40% of all online sales. While that makes up the majority of the company's revenue, it's actually not the most intriguing part of its overall business, which has grown to include cloud platform Amazon Web Services (AWS), a booming advertising segment, and even a stake in an emerging electric vehicle company.
AWS leads the entire cloud computing industry. It provides hundreds of different products and services to help companies operate online, whether they need to store data, develop games, or even supercharge their businesses with advanced machine learning tools. The segment contributed $67.1 billion to Amazon's revenue in the last 12 months, representing 14% of the company's $477.7 billion in total sales. But it's the profitability engine behind the entire organization, having generated all of its operating income over the same period -- if not for AWS, Amazon would've made an operating loss on a trailing-12-month basis.
That's the benefit of diverse revenue streams. When part of the business lacks performance, another piece can often pick up the slack.
Amazon's aggressive approach to entering new industries likely won't change anytime soon, given it has worked so well in the company's 28-year history. For that reason, investors should take the current 35% dip in its share price as an opportunity to build a long-term position. It's never too late to add quality stocks to your portfolio -- even Buffett himself is late to the party sometimes.
NASDAQ: AMZN
Key Data Points
Berkshire's bet on data analytics
Jamie Louko (Snowflake): Buffett is known for owning stable, low-volatility stocks, but Snowflake does not fall into that category. Snowflake makes it easier to analyze data stored in different clouds -- a migraine-level problem for large enterprises. It is a usage-based service in which customers only pay when they store and compute data, and as businesses create more data, it will only become a more vital service in the future.
Shares are down 66% from their all-time highs, but Snowflake's business performance is soaring higher. In its fiscal first quarter, which ended April 30, the company reported revenue growth of 85% year over year to $422 million. This was driven by the number of customers spending more than $1 million, which soared 98% year over year to 206.
One of the big problems with usage-based businesses is that customers can easily dial back their usage during a worrisome economic environment. However, Snowflake is in a relatively recession-resistant market because consumers need to continuously analyze data, and that won't change during an economic downturn.
Management expects specific customers to cut back on spending, but the company maintained its guidance set in the fourth quarter, indicating this won't take a major toll on growth.
The company lost $166 million in Q1, but it has over $3.8 billion in cash and expects to generate over $300 million in adjusted free cash flow during the full fiscal year, both of which could subsidize these losses. With a product that could become more necessary over the long term, Berkshire Hathaway seems to think that Snowflake is a great company to own, and you might want to consider following along.
A cash-flow machine
Trevor Jennewine (Apple): In 2022, Brand Finance once again recognized Apple as the most valuable brand in the world, highlighting its lineup of trendy electronic devices and the consumer loyalty those products inspire. Most notably, Apple dominates the U.S. smartphone space with 50% market share, and it ranks second globally with 18% market share.
The company certainly does make sleek hardware, but the engine behind its competitive edge is actually software. Apple's operating systems, such as iOS for the iPhone, are closed source. That means no third-party hardware vendor can use its 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 surged 17% to $106 billion over the past year.
Additionally, the company is investing aggressively in its services business, aiming to more effectively monetize its massive user base. That includes App Store sales, payment services like Apple Card and Apple Pay, and various subscription products like Apple TV+ and Apple Fitness+. Those efforts are paying off. In the most recent quarter, total revenue rose 9% to $97.3 billion, but services revenue soared 17% to $19.8 billion. And because Apple's services business comes with much higher margins, total gross margin climbed 120 basis points to 43.7%.
NASDAQ: AAPL
Key Data Points
Investors have plenty of reasons to be excited. Apple recently introduced new models of the MacBook Air and MacBook Pro, both powered by its proprietary M2 Chip, which the company says improves on the "industry-leading performance per watt of M1." Additionally, the company announced Apple Pay Later, a "buy now, pay later" service with zero interest and zero fees. Apply Pay Later allows U.S. consumers to make purchases (anywhere Apple Pay is accepted) 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. That's why this stock -- which happens to comprise 43% of Warren Buffett's holdings through Berkshire -- is a smart buy before the next bull market.
