Warren Buffett is widely recognized as one of the best investors in history, and it’s not hard to see why. His investment portfolio through Berkshire Hathaway was worth $306 billion at the end of the third quarter, and unrealized capital gains accounted for more than half of that sum. That success has inspired countless investors to follow in his footsteps.
With that in mind, two Buffett stocks currently stand out from the pack. The first is Amazon (AMZN) and the second is a new addition to Berkshire’s portfolio, chipmaker Taiwan Semiconductor Manufacturing (TSM).
Here’s what investors should know.
1. Amazon: A triple threat
Amazon operates the most-visited e-commerce marketplace in the world, and it will power nearly 40% of online retail sales in the U.S. this year, according to eMarketer. Better yet, the company has cemented its leadership with an extensive logistics business. It surpassed FedEx in U.S. delivery volume in 2020, and it is on pace to be the largest U.S. carrier in 2022. That affords the company tight control over shipping costs and delivery times.
Unfortunately, Amazon has struggled amid the unfavorable economy this year. Revenue jumped 15% to $127 billion in the third quarter, but high inflation drove operating expenses higher, causing earnings to drop 10% to $0.28 per diluted share. On the bright side, those headwinds are temporary, and investors have two good reasons to believe profitability will improve over time: cloud computing and digital advertising.
Amazon Web Services (AWS) has long been the market leader in cloud computing. Its first-mover status coupled with an unmatched capacity for innovation has helped it create a more extensive cloud-services portfolio than any other vendor. As a result, AWS generates twice as much revenue as its next closest competitor, Microsoft Azure. That bodes well. AWS consistently achieves an operating margin above 25% — several times higher than its retail operating margin. That means Amazon as a whole should become increasingly profitable as AWS accounts for a larger portion of total revenue.
Meanwhile, Amazon has rapidly gained share in digital advertising, another high-margin industry. Its marketplace and Fire TV streaming platform both enjoy tremendous popularity among consumers, and that has made Amazon a valuable advertising partner to countless brands. In fact, eMarketer says Amazon will account for 6.5% of all digital ad spend worldwide this year, making it the fourth-largest advertiser on the planet.
Amazon is a key player in e-commerce, cloud computing, and digital advertising, three large and growing industries. That should give investors confidence in its ability to rebound as the economy normalizes. In the meantime, shares are trading at 2 times sales, a significant discount compared to the five-year average of 3.8 times sales. That’s why this Buffett stock is a screaming buy.
2. Taiwan Semiconductor: The leading chipmaker
Taiwan Semiconductor is the largest chipmaker in the world with more than a dozen manufacturing facilities across Taiwan, China, and the United States. It produces chips for customers in several end markets, including smartphones, high-performance computing, the automotive sector, the Internet of Things, and consumer electronics.
Taiwan Semiconductor has long been on the cutting edge of process (chipmaking) technology, and its smooth transition into 5-nanometer chips in 2020 helped reinforce its leadership while Samsung struggled with production problems. Today, the company holds 56% market share in semiconductor foundry services, while Samsung ranks second with just 13% market share, according to Counterpoint Research.
Taiwan Semiconductor is a crucial link in the semiconductor supply chain, and that has translated into consistent demand over the years. That trend continued in the third quarter, as the company topped consensus estimates on the top and bottom lines. Revenue climbed 36% to $20.2 billion and earnings soared 66% to $1.79 per American depositary receipt (ADR).
Looking ahead, management expects fourth-quarter results to be less impressive, citing softness in consumer demand in the smartphone and PC end markets. But the long-term investment thesis remains intact. Taiwan Semiconductor serves customers at the forefront of several industries, including in consumer electronics, in smartphone chips, and in graphics and artificial intelligence. To that end, it should continue to benefit as those businesses grow.
With that in mind, shares currently trade at 5.8 times sales, a discount to the five-year average of 8.5 times sales. That’s why this stock is worth buying.
— Trevor Jennewine
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Source: The Motley Fool