Warren Buffett is better known for not favoring higher-risk stocks. However, since he has turned some of the stock-picking duties over to his lieutenants, Berkshire Hathaway's portfolio has taken on some riskier investments, particularly in the tech sector. These lieutenants have also bought IPO stocks, a practice Buffett previously avoided.
Still, some of these stocks hold potential for massive gains. To this end, investors would do well to take a closer look at three higher-beta stocks Warren Buffett owns: Nu Holdings (NU -0.46%), Snowflake (SNOW -1.00%), and StoneCo (STNE -0.26%).
1. Nu Holdings
U.S.-based investors are unlikely to be familiar with Nu Holdings. The Sao Paulo-based fintech financial services platform serves customers in Brazil, Colombia, and Mexico. This is notable because Latin America's fintech sector differs significantly from those in more developed parts of the world. In Nu's chief markets, large percentages of the population have neither bank accounts nor credit cards.
Part of Nu's competitive advantage is that it maintains less of a physical footprint than traditional banks do, and it passes on the cost savings from that model to its customers by keeping its fees low. With this approach, Nu has extended services to more than 60 million customers, almost 6 million of whom joined in the first quarter of 2022 alone.
Nu generated $877 million in revenue in Q1, up 258% from year-ago levels. However, the total cost of the financial and transactional services it provided rose by over 350% during that time. Even with slower growth in operating expenses, the company lost $45 million during the quarter, only slightly less than its $49 million loss from a year earlier.
Analysts expect its revenue growth to slow to 121% for the year. Nonetheless, the stock has declined by more than 70% from its 52-week high. With its price-to-sales ratio down to 12, the stock has begun to appear more reasonably valued. As Nu expands the availability of financial services to people in its heavily unbanked markets, it could turn profitable, benefiting both Buffett and the investors who join him in taking a chance on this stock.
2. Snowflake
Snowflake has emerged as a leader in the data cloud business. The data cloud is a network of thousands of organizations exchanging vast amounts of data across public clouds through secured access managed by Snowflake. This network lets users share governed data within businesses, with business customers, and with business partners. According to Snowflake, about 400 million data sets are still siloed, leaving it a vast potential market.
Admittedly, companies like Amazon or Microsoft can in theory compete with Snowflake, as they also offer data cloud software. But, while Amazon and Microsoft use specific protocols designed for their networks, Snowflake's protocols are agnostic and work with multiple cloud providers, eliminating a potential bias from a cloud infrastructure provider.
As of April 30 -- the end of its fiscal 2023 first quarter -- Snowflake's customer count was 6,322, up 40% year over year. The company believes the value of its addressable market will rise to $248 billion by 2026.
So far, Snowflake has only claimed a tiny fraction of that market. In its fiscal Q1, its revenue rose 85% year over year to $422 million. Its cost of revenue and operating expenses also grew at a rapid pace, albeit a slower one than the top line. The result was a loss of $166 million, down from a $203 million loss in the same quarter last year.
Snowflake stock has fallen by nearly 70% from its 52-week high. Its price-to-sales ratio prior to that decline often exceeded 100, and that high valuation may have contributed to the sell-off. While its current sales multiple of 27 is still pricey, this remains a top Warren Buffett stock to buy, as organizations' need for data cloud services is only increasing.
3. StoneCo
Like Nu Holdings, StoneCo is a Brazil-based fintech that U.S. investors may not know well. Stone's ecosystem resembles that of Block (formerly known as Square), offering fintech services and enterprise software to businesses. For a period, it grew rapidly amid the expansion of Brazil's fintech market, and it stood out by offering high-quality customer service with a "no bureaucracy" approach.
Unfortunately, the pandemic and Brazil's annualized inflation rate rising above 10% beginning in the summer of 2021 have hampered growth. The Brazilian government also made changes to banking regulations regarding fintechs that hurt StoneCo's legacy lending business.
However, management said on the Q1 2022 earnings call that it had reorganized its segments, separating its fintech businesses and digital commerce solutions to increase transparency. Moreover, as it adapts to the new banking regulations, its fintech businesses should recover.
Despite these troubles, Q1 revenue rose 139% year over year to 2.07 billion reais ($400 million). Still, rising expenses -- including a nearly eightfold increase in financial expenses -- took their toll. Consequently, StoneCo booked a net loss of 313 million reais ($61 million) in Q1, down from net income of 158 million reais in the prior-year quarter.
Not surprisingly considering these challenges, StoneCo's stock price has fallen dramatically. It has lost just shy of 90% of its value over the last year. Its price-to-sales ratio has fallen to just over 2, a dramatic drop considering it exceeded 40 in February 2021. Given the rapid growth of StoneCo and fintech in general, the stock should recover as the company adapts to market changes.
