You won’t see Warren Buffett buy small-cap stocks very often. That’s mainly because Berkshire Hathaway (BRK.A 1.07%) (BRK.B 0.53%) is so big itself, investing in small companies doesn’t move the needle enough. And Berkshire’s buying could make the share prices of these small companies skyrocket too much.
Instead, Berkshire’s portfolio primarily consists of large companies. Some are much larger than others, though. Buffett owns two stocks in the $1 trillion club. Are they no-brainer buys now?
Who says Buffett doesn’t like tech stocks?
Buffett shied away from tech stocks for years. He likes to focus on businesses that are in his wheelhouse. Technology simply wasn’t a great fit for him. However, things changed after the hiring of investment managers Todd Combs and Ted Weschler in 2010 and 2011, respectively.
Today, it’s not an understatement to say that Buffett loves at least one tech stock. A whopping 44% of Berkshire’s portfolio is invested in Apple (AAPL -0.21%). This percentage includes shares of the tech giant owned by Berkshire subsidiary New England Asset Management.
Buffett’s big bet on Apple has paid off nicely. The company now sports a market cap of around $2.57 trillion. Berkshire’s stake is worth more than $149 billion.
Either Combs or Weschler was also behind Berkshire’s purchase in 2019 of Amazon (AMZN 0.11%) stock. Buffett acknowledged, however, that he had “been a fan” of the company and was “an idiot for not buying” the stock sooner.
Berkshire didn’t build up its position in Amazon as it did with Apple. However, the e-commerce and cloud hosting leader’s market cap narrowly tops $1 trillion today. Berkshire’s stake is worth around $1.06 billion.
Huge opportunities
Apple can count on strong recurring revenue thanks to its fast-growing services business. Wedbush analyst Daniel Ives thinks that Apple’s services business alone is worth between $1.2 trillion and $1.3 trillion.
The company also has significant opportunities with future product innovations. There’s a lot of interest in Apple’s mixed-reality headset that could be launched later this year. Apple also appears to be looking to roll out a foldable smartphone at some point based on a patent it received earlier this year for such a device.
Meanwhile, Amazon has a gold mine on its hands with Amazon Web Services (AWS). Amazon CEO Andy Jassy predicts that the market share of total IT spending for cloud services will soar from between 5% and 10% today to as much as 95% over the next 10 to 15 years. AWS is the leader in the cloud market currently and will likely be a huge winner if Jassy is right.
But AWS isn’t Amazon’s fastest-growing segment right now. That honor belongs to the company’s third-party seller services. This business still has room to grow but will likely do so at a slower pace. On the other hand, Amazon is only scratching the surface of its opportunities in other high-growth areas, notably including digital advertising and healthcare.
No-brainer picks?
I like both of these Buffett stocks that are in the $1 trillion club. Apple and Amazon have great businesses and solid growth prospects.
The only wrinkle I see that would possibly cause hesitation in buying the stocks is valuation. Apple’s shares currently trade at over 27 times expected earnings, while Amazon’s forward earnings multiple is nearly 59.
Apple’s valuation is much loftier than it was when Buffett first bought the stock. On the other hand, Amazon’s P/E actually doesn’t look so scary when compared with its historical levels. Also, using earnings-based metrics with Amazon has been problematic because the company tends to invest heavily in new initiatives.
Are these stocks no-brainer picks right now? For some, that description might be a stretch. However, my view is that Apple and Amazon will continue to be solid winners for long-term investors.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon.com, Apple, and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon.com, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
