Warren Buffett has become a North Star for many investors. Under his leadership, Berkshire Hathaway shareholders saw annualized returns of 20.1% between 1965 and 2021, nearly double the returns of the broader S&P 500. That outperformance is a testament to Buffett's abilities as a business leader and an investor.
With the cash from Berkshire's various operations -- insurance, manufacturing, freight transportation -- Buffett has built a sizable equities portfolio. As the end of the first quarter, it was worth $390 billion, and that mind-boggling figure represents an unrealized gain of 168%.
Many of Buffett's stocks could be future market beaters, but two look like no-brainer buys. Let's dive in.
1. Apple
Apple (AAPL -0.57%) comprises a whopping 43% of Warren Buffett's portfolio, and you don't have to look hard to find the reason for his conviction. Apple's capacity for innovation and its lineup of trendy devices have won the company the kind of brand authority and pricing power than few businesses ever achieve.
Despite high inflation, Apple's installed base of active devices reached an all-time high across all major product categories and geographies in its most recent quarter. Better yet, services revenue soared 17% to $19.8 billion, fueled by strong growth in App Store sales, advertising, and cloud services. That means the company is more effectively monetizing its massive user base.
That's particularly noteworthy because services gross margin is nearly twice as high as product gross margin, meaning Apple's profitability is accelerating. To that end, revenue climbed 19% to $386 billion over the past year, and earnings soared 38% to $6.16 per diluted share. That trend should continue for the foreseeable future.
More broadly, Apple's capacity for innovation should help it maintain consumer mind share. The company recently introduced a number of new products at its Worldwide Developer Conference in early June, including a new MacBook Air and MacBook Pro, both powered by its second-generation silicon processor, the M2 chip. Apple also announced Apple Pay Later, a "buy now, pay later" product that expands its portfolio of payment services.
Further out, Apple has a mixed reality headset in the works. While the company has not confirmed anything, a report from Bloomberg suggests the device is slated for release next year. Perhaps more intriguing, Apple may also launch augmented reality (AR) glasses in 2024 to 2025. Given its reputation for premium hardware, it's not hard to imagine an Apple-made AR device becoming a "must have" for consumers. That's why this stock is worth buying.
2. Amazon
Amazon's share price has taken a beating this year, falling 43% from its high. But investors that sold have missed the forest for the trees. Every stock picker dreams of businesses that have a durable competitive edge and a dominant market position in a high-growth industry. Amazon checks all of those boxes -- twice.
In e-commerce, Amazon accounted for 41% of online retail sales in the U.S. last year, more than the next 14 retailers combined. Better yet, the company has built an expansive logistics network that should help it maintain its leadership. In fact, Amazon surpassed FedEx in terms of delivery volume in 2020, and it expects to surpass UPS this year. Amazon's arsenal of warehouses, trucks, and planes simplifies fulfillment for merchants and accelerate delivery for buyers, while helping the company control costs.
In cloud computing, Amazon Web Services (AWS) captured 33% market share in the first quarter, while Microsoft ranked a distant second with 21% market share. Research firm Gartner ascribes that dominance to AWS' capacity for innovation, noting that the company is often the market trendsetter. That quality should keep AWS at the forefront of the cloud industry for years to come.
Financially, Amazon stumbled over the past 12 months. Revenue rose a respectable 14% to $478 billion, but the company generated negative free cash flow of $24 million. That being said, those results reflect headwinds like supply chain issues, rising fuel costs, and inflation-driven changes in consumer spending, all of which are temporary in nature. More importantly, the long-term investment thesis for Amazon is still very much intact.
Specifically, eMarketer says e-commerce spending with grow at nearly 11% per year to reach $7.4 trillion by 2025, and Gartner says cloud spending will grow at 20% per year to reach $600 billion by 2023. Amazon should benefit from both trends, but the last point is particularly noteworthy, because cloud computing is far more profitable than retail. For instance, AWS typically achieves an operating margin around 30%, while Amazon's retail business is lucky to crack 5%.
That means Amazon will become increasingly profitable as cloud computing accounts for a larger percentage of its top line. And with shares trading at 2.2 times sales, Amazon is cheaper today than it has been for the last five years. That's why it looks like a good time to buy this growth stock.
