Warren Buffett will step down from his role as the CEO of Berkshire Hathaway at the end of the year. Although his legendary decade-long tenure is coming to an end, investors can still learn a great deal by studying the man's investing philosophy and examining the conglomerate's famous portfolio, which contains many excellent buy-and-hold options.
Two of the top picks among Berkshire Hathaway's 41 holdings are Amazon (AMZN 1.40%) and Visa (V +0.86%). These market leaders have the potential to deliver superior returns over the next decade.
Here is why.
Image source: The Motley Fool.
1. Amazon
Amazon is a highly profitable company with U.S. and international operations in e-commerce, grocery shopping, video and music streaming, advertising, and cloud computing. However, outside of its cloud operations, the company's business is relatively low-margin.
In the second quarter, Amazon's North America and international segments had operating margins of 7.5% and 4.1%, respectively. Here's the good news: In the next decade, e-commerce should continue expanding internationally, granting significant growth prospects to these parts of Amazon's business.
In the meantime, the company will seek to improve its margins by implementing artificial intelligence (AI) initiatives across its operations. The company has deployed more than a million industrial robots in its warehouses to that end. Amazon's North America and international segments generate hundreds of billions of dollars in annual revenue. Even modest margin improvements annually over the long run could have a meaningful impact on the company's bottom line.
NASDAQ: AMZN
Key Data Points
Then there is Amazon's fast-growing cloud unit. It is responsible for most of the company's operating and net income, thanks to its much juicier margins. With a suite of AI services whose demand continues to grow, Amazon Web Services should maintain this momentum for the foreseeable future. Lastly, some of Amazon's newer initiatives are expected to make a meaningful impact in the next decade as well.
Consider the company's Amazon Pharmacy. The U.S. prescription drug market is expected to be worth approximately $374 billion in revenue this year. Amazon boasts 180 million Prime members in the U.S. and offers a range of perks, including fast and free shipping, allowing patients to avoid the long lines at pharmacies. If the company can scale this business and the rest of its healthcare operations, it could have a meaningful impact on its results by 2035.
Even without that, though, Amazon's prospects for the next decade look highly attractive. Investors can safely add shares of the e-commerce specialist and hold onto them for a long time.
2. Visa
Visa owns one of the world's leading global payment networks. The company facilitates credit and debit card transactions, earning a fee for each. So, every time anyone swipes or taps a card branded with Visa's logo, the company pockets a percentage of the transaction amount. That's quite the business model.
To get an idea of the scale of Visa's business, consider that there are about 5 billion of its branded cards in circulation across some 200 countries, and the company supports hundreds of billions of transactions annually and trillions in total payment volume.
The result: Visa generates consistent revenue and profits, and it has for the past decade. The company also boasts a high-margin business. Visa's network infrastructure is already in place and can support its transaction volume with minimal additional cost.
The financial specialist also avoids the headaches associated with credit risk, as it does not issue the credit card itself. This also means it doesn't receive money from interest. Still, Visa's fee-based, capital-light model yields gross and net margins of around 80% and 50%, respectively, which is exceptional for a company of its size.
NYSE: V
Key Data Points
Although Visa has already achieved tremendous success, there is still plenty of room to grow, as the world increasingly requires digital (non-cash or check) methods of payment. Besides the fact that cash is clunky and less convenient to carry in high amounts than a credit card, the growth of e-commerce is also playing a role in this, since cash is an option in physical retail stores, but digital methods of payment are practically mandatory on e-commerce platforms.
Visa still estimates there's trillions worth of cash and check transactions to bring into its ecosystem. The company should ride that wave in the next decade and deliver excellent returns along the way.
