Warren Buffett's Berkshire Hathaway has a significant stake in Apple. The Mac maker accounted for 50% of its $353 billion stock portfolio at the end of the second quarter. But many investors incorrectly assume Apple is on the cutting edge of artificial intelligence (AI) innovation given its status as the biggest of the big tech companies. Wall Street is more skeptical.
Apple didn't even mention AI at its developers conference in June, and Needham analyst Laura Martin says the iPhone giant is "pretty far behind" its big tech peers where generative AI is concerned. That may or may not be true -- Apple does have a penchant for secrecy -- but investors would still be hard pressed to consider Apple an AI stock given the available information.
However, Berkshire does own small positions in Amazon(NASDAQ: AMZN) and Snowflake(NYSE: SNOW), and both have defined their AI strategies more clearly. Here's why these growth stocks are worth buying.
The investment thesis for Amazon boils down to three bullet points. One, it operates the most popular e-commerce marketplace worldwide, and its market share is still rising. Two, Amazon is the third-largest adtech company worldwide, and its market share continues to increase. Three, Amazon Web Services (AWS) is the leader in cloud computing, and its market share rivals that of Microsoft Azure and Alphabet's Google Cloud combined.
That last point is particularly salient because it positions the company as an epicenter for artificial intelligence (AI) innovation. Indeed, consultancy Gartner recently recognized AWS as a leader in cloud AI developer services, and the company is pressing its advantage by investing heavily in AI product development. Those efforts have already borne fruit. Amazon Bedrock is a new cloud service that allows businesses to access and customize pre-trained large language models to build generative AI applications.
However, CEO Andy Jassy recently highlighted an even more compelling reason why AWS is well positioned to be a category leader in generative AI, saying: "People want to bring generative AI models to the data, not the other way around. AWS not only has the broadest array of storage, database, analytics, and data management services for customers, it also has more customers and data stores than anybody else."
Here's the upshot: Straits Research says retail e-commerce sales will increase by 8% annually through 2030, and Grand View Research says the adtech and cloud computing markets will grow 14% annually during that period. Meanwhile, Bloomberg Intelligence expects the generative AI market to compound at a 42% growth rate annually through 2033. Those figures imply low-double-digit sales growth for Amazon (at a minimum) for the foreseeable future, which makes its current valuation of 2.7 times sales look cheap. That's why this Warren Buffett stock is worth buying.
Data is the cornerstone of AI, and Snowflake helps businesses manage big data across public clouds and private infrastructure. Its platform supports multiple workloads that businesses have traditionally tackled with a patchwork of tools, including data engineering for ingestion, data lakes for storage, and data warehousing for analytics. But product consolidation is not its only advantage.
One of Snowflake's greatest selling points is its cloud neutrality, meaning it supports those workloads across all three major public clouds. Snowflake also allows customers to securely share, buy, and sell data, which creates a potentially powerful network effect: its platform becomes increasingly valuable as more businesses onboard data. No other company offers the same breadth of functionality and flexibility.
Snowflake reported solid financial results in the second quarter of fiscal 2024 (ended July 31). Its customer count increased 25% to 8,537, and the average customer spent 42% more over the past year. In turn, revenue soared 37% to $640 million, and non-GAAP earnings improved to $0.22 per diluted share, up from $0.01 per diluted share in the year-ago period.
Turning to the future, investors have good reason to think Snowflake can maintain its growth trajectory. CEO Frank Slootman provided the following insight during the latest earnings call: "Data sharing makes Snowflake uniquely positioned to enable AI workloads." Slootman also said enterprises cannot have an AI strategy without first developing a data strategy.
That AI tailwind, coupled with the broader benefits of developing a data strategy, should help Snowflake achieve its medium-term target of $10 billion in annual revenue by fiscal 2029 (ends Jan. 31, 2029). That implies annual revenue growth of 37% over the next four-and-a-half years.
In that context, Snowflake's current valuation of 21.4 times sales looks reasonable, and it's certainly a discount to the three-year average of 66.4 times sales. Investors should feel comfortable buying a small position in this growth stock today. I would start with 1% of my portfolio (or less) and selectively add shares during pullbacks.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon.com. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Berkshire Hathaway, Microsoft, and Snowflake. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.