Ideas about Warren Buffett’s portfolio continue to evolve. Buffett ditched his longtime disdain for technology by making Apple more than 40% of its portfolio. In addition, a new generation of portfolio managers, called its “lieutenants”, now influences the selections of Berkshire Hathaway. They may have been behind the decision to buy more expensive, dividend-free stocks like Amazon and Snowflake.
Still, if more tech stocks turn into Warren Buffett’s investments, there are several picks that could not only fit his philosophy, but also offer significant returns over time. Metaplatforms (META 0.39%), Nvidia (NVDA 1.01%)and Alphabet (GOOGL 1.79%) (GOOG 2.10%) are three examples.
Meta may not seem like Buffett’s choice at first glance. CEO Mark Zuckerberg has gone all out on the metaverse, changing the company’s name from Facebook and pouring massive capital into Reality Labs, back-to-back moves that may or may not yield significant returns. Moreover, after years of double-digit revenue growth, it only grew by 3% in the first half of 2022.
However, despite all the attention given to the Metaverse, Meta remains a dominant social media stock. Industry leadership and its claim of 3.7 billion monthly active users demonstrates the kind of competitive gap Buffett might be interested in.
Buffett also likes to see strong cash flow, which Meta knows how to produce. The company generated $13 billion in free cash flow in the first half of the year. It would have been even higher if capital expenditures had not increased by 45%.
And Buffett likes to buy such cash flow at a bargain price. The company’s price-to-earnings (P/E) ratio now stands at 14. That’s less than mega-caps such as Buffett’s beloved Apple (at 26 P/E) or Microsoft (has 27 P/E). That means investors like him can buy social media dominance and a huge flow of free cash at an attractive valuation.
Buffett might also like a company that helps out in the metaverse, Nvidia. The chipmaker slowed amid a slowing economy, and investors sold the stock as revenue growth slowed and rising costs reduced net income.
The gaming and graphics capabilities of its GPUs play a crucial role in many technological innovations such as artificial intelligence (AI), virtual reality, Internet of Things and data centers. Nvidia dominates many niches and claims around 80% of the discrete GPU market, according to Jon Peddie Research. Between the need for its technology and its leading position, Nvidia enjoys a wide competitive gap.
Free cash flow suffered from the slowdown. It generated $2.2 billion in free cash flow for the first half of the fiscal year, which ended July 31. That figure was down from more than $4 billion in the same period last year.
Moreover, his P/E ratio of 46 is a little different from Buffett, especially since his rival AMD is trading at 35 P/E. Still, given that Amazon is selling for more than 115 times its earnings, Nvidia could still attract Buffett’s attention.
3. Alphabet letters
Alphabet might be the best FAANG stock to own for Buffett and tech investors in general. Its dominance in search and other online businesses has helped boost its advertising revenue. Moreover, it continues to strengthen its dominance by improving AI and machine learning capabilities.
He has applied this success to many businesses over the years. Chief among them is Google Cloud, which has also applied the company’s artificial intelligence and machine learning tools. Such innovation has helped Alphabet become the largest cloud provider behind Amazon and Microsoft, according to Synergy Research.
Even at a time when technology struggled, the company generated about $28 billion in free cash flow in the first half. This is down slightly from the same period in 2021, when free cash flow was around $30 billion.
Yet that figure would have increased without a 46% increase in capital expenditures. And with about $125 billion in cash, it has built one of the strongest balance sheets among public companies.
Finally, Buffett could buy this cash flow at a P/E of 21, a level closely approximating the S&P500 average of 20 times earnings. This makes Alphabet a must-have value given its ability to generate massive amounts of free money from its powerful ad- and cloud-based applications.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Will Healy has positions in Advanced Micro Devices and Berkshire Hathaway (B shares). The Motley Fool owns and recommends Advanced Micro Devices, Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Meta Platforms, Inc., Microsoft, Nvidia and Snowflake Inc. Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 calls on $120 on Apple, short January 2023 put options on $200 on Berkshire Hathaway (B shares), short January 2023 calls on $265 on Berkshire Hathaway (B shares), and short calls of $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.