Any stock that trades at a cheap valuation compared to its current earnings can technically be called a value stock, regardless of how quickly it is growing. In other words, the terms value stock and growth stock are not mutually exclusive.
Even so, the term value stock most often refers to a mature businesses that generates stable revenue and earnings. Warren Buffett has made a fortune investing in companies that fit that mold, and he possesses an uncanny ability to identify great bargains in the stock market. For instance, Coca-Cola, American Express, and Moody's account for more than 17% of Buffett's portfolio, and all three stocks have skyrocketed more than 1,500% since he bought them.
However, Buffett also has stakes in a few companies that don't fit the value stock mold, including Snowflake (SNOW -0.26%) and Amazon (AMZN -1.14%). Both companies are difficult to value based on current earnings, as neither generated a GAAP profit in the most recent quarter. Instead, the market tends to value these stocks based on long-term growth potential.
That brings us to the question: Are these oddball Buffett stocks worth buying?
Snowflake: A powerful data platform
Digital transformation has turned enterprise IT environments into a complex maze of data held hostage by countless software systems. That complexity often spans across public clouds and private infrastructure. The Snowflake Data Cloud helps businesses unify and make sense of data. That, in turn, can drive a number of positive outcomes -- more effective marketing, better artificial intelligence, or even the ability to provide a more personalized customer experience.
The vast utility of the Snowflake Data Cloud distinguishes it from competing platforms. Specifically, it can handle a number of different workloads that traditionally required point solutions. These workloads include data ingestion, transformation, storage, and analytics, as well as the ability to govern and securely share data. Snowflake also provides development tools that help businesses build and monetize data-driven applications in the Data Cloud.
Thanks to its utility, Snowflake is growing at a tremendous pace. Its customer count increased 36% in the past year, and the average customer spent 71% more. Second-quarter revenue climbed 83% to $497 million, and free cash flow clocked in at $59 million, up from $3 million in the same quarter last year.
Turning to the future, investors have good reason to be bullish toward Snowflake stock. As enterprises continue to invest in digital transformation, the amount of data generated on a daily basis will continue to soar, and that should drive demand for Snowflake. Better yet, the company is rising to the occasion with what management calls a vertical sales strategy. Specifically, Snowflake offers several industry-specific versions of its Data Cloud, featuring data sets and tools tailored to end markets like financial services, healthcare, and media. Those industry-specific solutions reduce friction and accelerate time to value for customers.
Snowflake puts its market opportunity at a whopping $248 billion by 2026, leaving plenty of room for growth. For that reason, despite a pricey valuation of 32 times sales, risk-tolerant investors should consider buying a few shares of this growth stock.
Amazon: A leader in e-commerce and cloud computing
Amazon has been hit hard by inflation this year. Consumers have pulled back on discretionary purchases in response to high inflation, causing top-line growth to decelerate. At the same time, the rising cost of fuel and labor has weighed on its bottom line. As a result, Amazon saw revenue rise just 7% in the second quarter, and it posted a GAAP loss of $0.20 per diluted share.
While those results are certainly disappointing, they were driven by temporary headwinds. Investors need to focus on the long-term potential, not the short-term problems. And there are three big reasons the future looks bright for Amazon.
First, Amazon operates the most popular online marketplace in the world. It receives nearly twice as many visitors as the next closest competitor, and it's expected to power nearly 40% of e-commerce sales in the U.S. this year, according to eMarketer. For context, that means Amazon has more market share than the next 14 top competitors combined. That bodes well for the future, as U.S. e-commerce sales are expected to grow 12% per year to $1.7 trillion by 2026.
Second, Amazon Web Services (AWS) is the clear leader in cloud computing. It holds more market share in cloud infrastructure services than Microsoft Azure and Alphabet's Google Cloud combined, and research company Gartner recently noted that AWS often sets the pace for innovation in the cloud computing industry. That advantage, according to Gartner, has translated into "materially more mind share" compared to other vendors, and it should keep AWS on the cutting edge of cloud services for years to come. That is particularly noteworthy because the cloud computing market is expected to grow nearly 16% per year to $1.6 trillion by 2030.
Third, Amazon has quietly become a powerhouse in digital advertising. It captured 5.8% of global digital ad spend last year, up from 3.8% in 2019. That makes Amazon the fourth-largest digital ad company, and its market share could surpass 7% by 2023, according to eMarketer. Looking further ahead, digital ad spend is expected to grow 10% per year to $876 billion by 2026.
As a final thought, cloud computing and digital advertising generally have much higher margins than retail. Amazon does not disclose operating metrics for its ad business, but AWS achieved an operating margin of 29% in the second quarter. That is roughly six times higher than the typical operating margin in its other segments. To that end, Amazon should see profitability accelerate as cloud computing (and digital advertising) become a larger percentage of total revenue.
For all three reasons, this growth stock is a smart buy right now.
