Warren Buffett has cultivated a reputation for being somewhat averse to tech stocks as Berkshire Hathaway’s CEO, preferring to focus on businesses that were less complicated. But Buffett has come around to some technology stocks in recent years, and top tech investments have been among the best-performing assets in Berkshire’s portfolio.
Read on to see why StoneCo (NASDAQ:STNE), Amazon (NASDAQ:AMZN), and Apple (NASDAQ:AAPL) have what it takes to be winners.
Buffett and Berkshire established a substantial position in StoneCo when the Brazilian fintech company had its initial public offering two years ago. The company’s share price has climbed roughly 170% from its $24-per-share IPO price, and the stock still offers attractive long-term upside.
Adoption for payment-processing services in Brazil remains low compared to the U.S., Europe, and much of Asia, but there’s big room for growth in the category as Brazilians increasingly rely on card- and mobile-based payments instead of cash for everyday transactions. The company also looks poised to benefit from the growth of online retail in Brazil and other Latin American countries.
A 2019 report from J.P. Morgan estimated that e-commerce accounted for just 3.2% of Brazil’s overall retail market. Long-term growth for e-commerce will spur demand for payment-processing services, and StoneCo is already seeing benefits of this trend. The company has managed to post strong growth even as the coronavirus resulted in temporary shutdowns and reduced consumer traffic at brick-and-mortar retail operations, and overall performance has started to improve with store operations returning closer to normal.
Stone managed to add 63,000 new merchant clients in the third quarter, and adjusted total payment volume conducted through the company’s platform soared 48% compared to the prior-year period. Adjusted sales for the period jumped 46% year over year. The company should continue to post strong growth as it brings more merchant partners on board its payment platform and takes a small cut of the total transaction volume conducted across its platform.
Stone is posting a stellar performance, and it looks like its run is just getting started.
The Tech Titan – Amazon
If you’re looking for a great tech stock within Berkshire Hathaway’s portfolio, look no further than Amazon. Warren Buffett’s company owns more than $1.6 billion of the e-commerce giant’s shares — and it’s easy to see why.
Buffett and his investing lieutenants, Ted Weschler and Todd Combs, place a great emphasis on finding businesses with powerful and durable competitive advantages. Amazon certainly fits the bill. It dominates the online retail market in the U.S. and many international markets. Amazon is also a powerful force in the global cloud computing market. And not to be overlooked is Amazon’s advertising business, which is quickly gaining share in the digital ad market. These are three massive and fast-growing industries, and together, they provide plenty of room for expansion even for a company the size of Amazon.
Amazon is also offering investors something else Buffett loves: a discount. Its shares are currently down about 12% from their 52-week highs. In recent days, traders rotated out of companies that have excelled during the coronavirus pandemic after Pfizer and BioNTech said their coronavirus vaccine candidate might be more than 90% effective at preventing COVID-19. Yet while this is certainly great news on the COVID-19 front, it’s no reason to sell Amazon’s stock.
Millions of people have shopped on Amazon.com for the first time during the coronavirus crisis. After experiencing the wide selection of goods, cost savings, and convenient shipping options the online retail king provides, many of these people will remain loyal Amazon customers. Investors, therefore, should consider using the recent sell-off in Amazon’s stock to pick up some of its shares at a significant discount.
The Market Giant – Apple
Buffett has bitten into Apple more deeply than any other stock. Today, Apple accounts for nearly half of Berkshire Hathaway’s stock holdings.
Buffett has profited significantly from his Apple investment and has periodically added to his position. In 2016, he bought more than 61 million shares at a cost of just under $7 billion. Additional purchases in 2017 and 2018 followed. Although he sold small stakes in 2019 and possibly in the most recent quarter, his holdings of just over 1 billion shares amount to a value of around $120 billion.
This represents a huge turnabout considering that Buffett avoided tech stocks for most of his career. Nonetheless, Apple looks like a typical Buffett value stock. For most of the previous decade, Apple’s forward P/E ratio stood in the teens. Now, with some long-overdue multiple expansion, Buffett logged significant profits as that forward valuation grew to 30.
Also, its potential growth arguably justifies this valuation. In its fourth quarter, both revenue and earnings fell slightly from year-ago levels amid the COVID-19 pandemic. However, it recorded record revenue from Macs and services.
Moreover, with its health monitoring benefits, the Apple Watch also shows significant potential. Revenue in the wearables, home, and accessories segment grew by 21% in the latest quarter.
Additionally, with the introduction of the iPhone 12 and its 5G capabilities, the company will likely benefit from a 5G upgrade cycle over the next few years. This will probably mean that Apple remains a core Buffett holding for a long time to come. (courtesy: Motley Fool)