This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Both Netflix (NASDAQ: NFLX) and Spotify (NYSE: SPOT) had great starts to 2025, but investors soured on the streaming giants in the back half of the year. Shares of both have fallen between 25% and 30% since midyear as poor earnings results have weighed on the stocks.

But with the drop in price for each stock, investors may have an opportunity to scoop up shares of a great company at the forefront of a long-term growth trend in streaming media. One of the streaming companies stands out as a great opportunity heading into 2026. 

What's weighing on each stock?

Shares of Spotify began to fall after the company released its second-quarter earnings results, which showed a worsening operating margin and negative earnings per share. It course corrected somewhat in the third quarter, but CEO Daniel Ek announced he was stepping down and the company provided weak fourth-quarter guidance, sending the stock lower.

Netflix stock also sold off after its second-quarter earnings due to management's disclosure that its strong financial results and outlook were driven by improvements in foreign-exchange rates rather than increased engagement or willingness to pay from consumers. The sell-off accelerated after a one-time Brazilian tax weighed on third-quarter results. More recently, Netflix's proposed acquisition of Warner Bros. Discovery has pushed shares lower, as investors see regulatory and operational challenges for the merger.

To be sure, neither company is showing significant weaknesses. However, with both stocks priced for strong and continuous growth, any minor hiccup can lead to investors losing confidence in the company's value and selling their shares. A company with a strong competitive advantage is better equipped to weather setbacks and overcome financial challenges, as its operating results ultimately prevail in the long run. I believe one of these companies has a greater competitive advantage that should enable it to produce strong long-term results and could allow the stock to bounce back quickly in 2026.

Which company has a wider moat?

One of the biggest indicators that Spotify and Netflix have competitive advantages in the market is that they've both been able to increase prices. Spotify made two pricing changes in the United States in 2023 and 2024, and another price increase could be on the way next year. Netflix, meanwhile, has consistently raised prices since 2014.

Spotify currently charges a premium relative to competitors, but it also includes additional content with the price. Specifically, premium subscribers can listen to 20 hours of audiobooks each month. Differentiated content is key for the streaming service to stand out from the pack.

But acquiring differentiated content in music streaming is practically impossible. Every service has access to the same 100 million songs, and they all pay the record labels relatively standard royalties for access to their libraries. That means that Spotify doesn't have a clear advantage in content, and it doesn't have a lot of leverage on its content costs. That will limit its margin expansion over time.

By comparison, Netflix has built a differentiated library of unique content on its platform through a combination of original productions and exclusive licensing agreements. As the largest video streaming service, it can afford to spend more money on productions and licensing agreements for key content, as it amortizes those costs over a larger number of subscribers. It doesn't pay a fee every time someone streams a show like Spotify. As a result, it's able to produce meaningful margin expansion over time.

Netflix historically sets a target operating margin at the start of the year. With its highly predictable subscription revenue, it's able to manage its content spending to come very close to its target in normal circumstances. Despite the Brazilian tax it paid last quarter, management's full-year outlook still calls for its operating margin to expand 1.6 percentage points for the year. Spotify has less room to control costs and expand its margins.

A better value

The market prices Netflix stock at a much more attractive valuation than Spotify, with shares trading hands at less than 30 times analysts' consensus estimate for 2026 earnings. Spotify shares, by comparison, will cost closer to 50 times 2026 estimates.

That said, analysts expect Spotify to deliver strong earnings growth over the next few years. But with its high valuation, any revision in those estimates lower could cause the stock to pull back further. Netflix might not have the same expected earnings per share growth, but investors can have more confidence in the company hitting those targets. Strong execution in 2026 should push the stock price back toward its all-time high and beyond.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Netflix, Spotify Technology, and Warner Bros. Discovery. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett has never been one to push Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) into hot trends. He gave an excellent reason for that in his 1996 letter to shareholders: 

We are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.

In other words, Buffett would rather be the tortoise than the hare. So, hot trends like internet stocks in 1996 or booming artificial intelligence (AI) companies today don't interest him too much as an investment manager.

Nonetheless, Buffett finds himself in charge of a stock portfolio where roughly 23% of the assets are invested in three companies that are heavily tied to AI -- among them, one of Berkshire's biggest equity purchases of the last few years. But all three have qualities that he generally seeks in investments -- and qualities that will surely set up his successor, Greg Abel, to deliver excellent returns for the next 10 or 20 years or more. 

1. Apple (20.5%)

Apple (NASDAQ: AAPL) has been the largest position in Berkshire Hathaway's equity portfolio since Buffett and his right-hand man, the late Charlie Munger, built up a massive stake in the company between 2016 and 2018. At this year's shareholder meeting, Buffett jokingly thanked Apple CEO Tim Cook for making Berkshire Hathaway shareholders more money than he ever has.

But Buffett has been selling shares of Apple since late 2023. There may be a few reasons for that. First, the stock's weight in the portfolio might have been too much, even for Buffett, who historically keeps a highly concentrated portfolio. At its peak, Apple accounted for about half of the portfolio's value. It remains Berkshire's largest marketable equity holding heading into 2026, based on the conglomerate's most recent SEC disclosures.

Second, Buffett saw what he viewed as an opportunity to take gains while corporate tax rates are low, as he expects that Congress will have to increase tax rates due to the federal government's massive deficits and debts. Lastly, Buffett assessed the valuation of Apple stock and deemed it to be well above its intrinsic value.

That last point is key. Apple hasn't benefited as much as other tech giants from the increase in AI spending on semiconductors, cloud computing infrastructure, and advanced software. It has continued to exhibit steady revenue and earnings growth, though, and its earnings per share have been further boosted by its massive share-repurchase program. But the stock now trades for a premium valuation of about 33 times forward earnings estimates, in line with other big AI stocks.

However, Apple will push its AI ambitions forward next year with the long-awaited release of a revamped Siri that will feature numerous new generative AI capabilities. The advanced AI assistant may spur a big upgrade cycle for the company's devices, pushing iPhone sales higher. Additionally, the introduction of more on-device AI capabilities could increase its high-margin services revenues significantly in the coming years. Based on those expectations, it may be worth paying a premium for Apple stock.

2. Alphabet (1.8%)

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is the latest major addition to Berkshire Hathaway's portfolio. The conglomerate acquired 17.8 million shares during the third quarter, which are worth $5.6 billion as of this writing.

The stock has been on an incredible run since September, when a federal judge imposed remedies upon Alphabet that were much more lenient than expected following its conviction for maintaining an illegal monopoly in online search. Strong financial results and continued momentum for both its cloud computing business and its large language model (LLM) development have helped propel the stock materially higher.

Its cloud computing business has seen strong growth. Revenue climbed 33% last quarter, and its operating margin expanded to 24%, but there could be even more room for margins to expand as it scales. That's especially true given the momentum for its custom Tensor Processing Units (TPUs), which can offer its cloud computing clients a more cost-effective alternative to graphics processing units (GPUs) for AI training and inference. It has signed several big deals with major AI developers to use its TPUs, helping push its remaining performance obligations 46% higher year over year to $155 billion.

The core search business remains a cash cow despite the threat of AI chatbots taking market share away from Google. The company has effectively integrated AI into its search results through AI Overviews and AI Mode, resulting in an increase in search traffic without negatively impacting monetization. As a result, Google Search revenues continue to climb. And that may have been the key to Buffett's decision to invest in the company -- the "enormous competitive strength" of its core business.

As mentioned, Alphabet shares have climbed significantly in Q4, pushing their valuation to almost 30 times expected earnings. It's unclear if Buffett and his team will keep buying shares at that significantly higher valuation, but they could be worth it given the AI-driven momentum behind the company.

3. Amazon (0.7%)

Amazon (NASDAQ: AMZN) has been a small position in Berkshire Hathaway's marketable equity portfolio since 2019. Based on the size of the investment, many believe one of its other investment managers, Ted Weschler or Todd Combs, made the decision to buy it. The driving force behind Amazon's operations when Berkshire first acquired shares in 2019 was its cloud computing division, Amazon Web Services (AWS). That remains true today. 

AWS is the world's largest public cloud computing platform. Its revenue is more than double Google Cloud's, and its operating margin of 35% dwarfs it. Management notes its AI services on AWS are growing at a triple-digit percentage pace, and demand continues to outstrip its ability to add capacity despite three years straight of building as fast as possible.

Like Alphabet, Amazon's massive investment in cloud capacity to capitalize on the AI opportunity is supported by a stalwart business with a wide competitive moat. Amazon's e-commerce business has become increasingly profitable over the past few years. That profitability has been driven by an increase in high-margin advertising sales as a percentage of total revenue, improvements to its logistics network to reduce shipping costs and operating expenses, and the continued growth and scale of its Prime subscription service. As a result, the operating margin for the North American retail business has expanded to 6.6% over the last 12 months, and the international segment's margin sits at a respectable 3.2%.

Amazon shares have recently been weighed down by investors' concerns about the high capital expenditures for its cloud computing business. As of Q3, its free cash flow over the last 12 months fell to $14.8 billion. But as sales continue to grow, margins expand, and capital spending levels off, Amazon should see its free cash flow soar to new highs. That could push the stock price significantly higher, making the stock worth paying a premium multiple of free cash flow for today. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet, Amazon, and Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, and Berkshire Hathaway. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Artificial intelligence (AI) is responsible for adding trillions of dollars in value to a handful of companies over the last few years. Nvidia, for example, briefly touched a $5 trillion market cap this year, thanks to its dominant position in the market for graphics processing units (GPUs). Four other companies sit firmly above the $2 trillion threshold as we approach the new year. 

But three AI stocks currently have similar market caps around $1.6 trillion as of this writing, and are vying to become the first new $2 trillion company of 2026: Meta Platforms (NASDAQ: META), Tesla (NASDAQ: TSLA), and Broadcom (NASDAQ: AVGO). Here's my prediction for the next company to top the milestone, and it could come as soon as next year. 

Artificial intelligence is fueling all three

Meta, Tesla, and Broadcom have all seen their stock prices heavily influenced by advances in AI this year.

Meta stock climbed higher early in the year as its efforts to improve its recommendation algorithms bore fruit. Ad revenue climbed higher as time spent on its apps increased, and ads became more effective. However, the stock took a step back recently as management shared plans to increase its AI-related spending.

Tesla's value is heavily tied to its robotaxi service and AI innovations. The stock received a boost over the summer when it launched its robotaxi pilot in Austin, Texas. Investors added to those gains on promising progress on the company's next-generation AI chip for its vehicles.

Broadcom's custom AI accelerator business has gained momentum in 2025, as the company signed big contracts with OpenAI and Anthropic, the latter of which is buying Alphabet's Broadcom-designed tensor processing units (TPUs). To that end, Alphabet and Broadcom are seeing excellent progress in shifting more developer workloads to TPUs, which offer greater energy efficiency and cost savings versus Nvidia's GPUs.

Broadcom stock took a step back after its last earnings report, as many analysts were disappointed with management's expectation that greater AI chip sales would come at a lower gross margin.

While all three of these stocks have a path to a $2 trillion valuation in 2026, I expect Meta Platforms to reach the milestone first. Here's why.

AI-powered earnings growth at an attractive valuation

Even with its run rate of $200 billion in annual revenue, Meta is still growing its bottom line quickly. Adjusted earnings per share climbed 20% in the third quarter, and improvements in AI are the reason.

Meta has seen an increase in both ad impressions and price per ad for eight straight quarters. That indicates that it's increasing user engagement and opening new places within its apps for advertising while making ads more effective.

Management attributes a shift in its recommendation algorithm to make it more general across formats as the primary reason users are spending more time on its apps. Meta has seen similar improvements by applying the same methodology to its advertising algorithm. In other words, bigger models have directly translated into more revenue.

That trend should continue in 2026, as Meta opens up more opportunities for advertising, including on Threads and WhatsApp. It could also begin monetizing Meta AI, its generative AI chatbot. The improvements in its algorithms over the last couple of years should enable it to ramp up advertising quickly without as much negative impact on its pricing as we've seen in the past.

The bigger opportunity for Meta in 2026, though, may be the expansion of its generative AI features. It's reportedly working on an AI agent that can manage advertising campaigns for small businesses. CEO Mark Zuckerberg repeatedly talks about the opportunity to handle everything involved with creating, testing, and optimizing ad campaigns on its platform through an AI agent.

And chatbots specializing in sales and customer service for a company could open the door for more businesses to push Facebook and Instagram users to start messaging them through Meta's chat apps.

With small- and medium-sized businesses accounting for the bulk of advertisers on Meta's platform, these innovations have the potential to dramatically increase the amount they're willing to spend on ads. If the overhead for these clients is much lower, they can increase their ad spending and scale up their businesses faster.

Those efforts should fuel another year of strong revenue growth. And while depreciation expense from the increase in AI-related capital expenditures could eat into earnings growth, Meta should be able to manage continued improvements in earnings per share with the help of share repurchases.

The stock trades for just 26 times forward earnings expectations, which is much lower than Broadcom's multiple and less than one-tenth the multiple Tesla stock trades for. I expect Meta to fetch a higher earnings multiple as it proves its AI spending to be well worth it once again in 2026, pushing its valuation to $2 trillion. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet and Meta Platforms. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Meta Platforms, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom. The Motley Fool Australia has recommended Alphabet, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Artificial intelligence (AI) has been the driving force behind many of the stock market's biggest winners over the last three years. Big companies like Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have seen their share prices reach new all-time highs, driven by strong AI-related business results across both software and cloud computing. Both companies are pushing toward $4 trillion valuations. Meanwhile, Nvidia briefly touched a $5 trillion market cap this year as big tech companies continue to buy up its graphics processing units (GPUs) as fast as it can sell them.

But not every AI-related stock has zoomed higher this year. One company, in particular, has seen its stock stuck in neutral, climbing less than 5% this year while the S&P 500 is up more than 17%. But that could be a buying opportunity for long-term investors. In fact, the stock could produce very strong returns as soon as next year. Here's why you'll want to own Amazon (NASDAQ: AMZN) in 2026.

A dominant force across three major industries

Amazon may have started as a small online bookseller, but it has grown to be much more. Its marketplace offers nearly everything you can think of, and it can ship millions of items to U.S. customers within one to two days thanks to its massive fulfillment network. It has built a burgeoning advertising business that has expanded from retail media ads to video ads served through its Prime Video service and other streaming partners. And it's the largest cloud computing platform in the world, operating Amazon Web Services (AWS).

All three businesses are experiencing rapid growth and demonstrating strong momentum.

The online retail business continues to produce high-single-digit revenue growth despite generating over $250 billion in annual sales. Its third-party seller services, which enable other businesses to sell through Amazon's marketplace, are showing accelerating growth, up 11% in the most recent quarter. The entire ecosystem rests on Amazon's Prime subscription service, which has steadily pushed subscription revenue 10% higher.

Amazon's advertising business is accelerating, climbing 24% in the most recent quarter, reaching a $70 billion run rate. Prime Video is a key catalyst for that continued growth, as 80% of subscribers are on the ad-supported tier and Amazon adds more live sports content to the service. It has also partnered with several major streaming platforms through its demand-side ad-buying platform.

Overall, Amazon is seeing operating margin expansion in its North American and International reporting segments. A couple of factors are leading to higher margins. First, advertising sales have extremely high margins relative to product sales and even third-party services. The second is that Amazon's improvements to its fulfillment center have reduced its shipping costs. Shipping costs have increased at a slower pace than paid units in each of the last eight quarters.

Amazon's cloud computing business remains the company's most important segment, accounting for most of the operating income and growing quickly. Management has successfully reaccelerated revenue growth for the segment, achieving 20% year-over-year growth last quarter, driven by strong triple-digit revenue from AI services. That rate is significantly slower than both Microsoft and Google, but AWS is also growing off a larger base.

CEO Andy Jassy expects sales to continue at the current pace for the foreseeable future. That's supported by a growing backlog, which reached $200 billion by the end of the third quarter. Amazon also signed deals in October with commitments exceeding everything it booked in Q3, so there's a lot of momentum behind the cloud computing segment to keep growing.

Amazon looks undervalued right now

Amazon is investing heavily to capitalize on the opportunities it sees in both cloud computing and e-commerce. It spent $90 billion through the first three months of the year on capital expenditures (capex), and management expects full-year cash capex to come in around $125 billion. That's well above Alphabet's planned $92 billion in capex for the year and slightly more than Microsoft (which spent $80 billion through the first nine months of the year).

That high spending has weighed heavily on Amazon's free cash flow, which fell to $14.8 billion over the trailing-12-month period. That's down from $47.7 billion in the previous 12-month period. Indeed, the high capex has hit Amazon's cash flow much harder than capex has hit either Microsoft or Alphabet. That's in part because its competitors have high-margin software businesses that continue to grow quickly, offsetting their spending, while Amazon's retail business still has relatively low margins.

But Amazon has gone through multiple investment cycles throughout its history. Each time, it has emerged with much stronger cash flows than it had before the investment cycle. Considering the growing backlog of cloud computing contracts and the secular trend toward migrating to cloud computing services, investors should remain confident that the pattern will hold. While management expects to increase its capex further in 2026, free cash flow will eventually trough as capital intensity levels off. With strong operating cash-flow growth, Amazon should see a rapid recovery in free cash flow.

Amazon has historically traded around 50 times its free cash flow near its peaks. With its current market cap of $2.5 trillion, investors are merely expecting it to return to its peak free-cash-flow levels from a bit over a year ago. It seems very likely that Amazon will far exceed those levels over time, pushing its stock price significantly higher.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet, Amazon, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Nvidia (NASDAQ: NVDA) has seen its fortunes rise on the back of surging demand for artificial intelligence compute. Its graphics processing units (GPUs) stand out as best in class when it comes to AI training and inference, which has resulted in soaring prices for its chips as big tech buys up supply as fast as Nvidia can make them.

Thanks to its technology lead, Nvidia commands a market share of around 80% of all AI chips for rent on cloud computing platforms, according to estimates. And that might only be limited by its ability to supply enough chips to its biggest customers.

But one of those major customers just signed a deal that could signal that dominant market share is under threat. And if Nvidia's other major customers follow suit, it could be reason to pump the brakes on Nvidia's stock.

Nvidia is heavily reliant on just a handful of big tech names

While Nvidia has exhibited extremely impressive revenue growth over the last few years, that sales growth stems from just a handful of customers. In fact, its customer concentration is increasing. Last quarter, just two customers accounted for 39% of its total sales. Its top six customers accounted for 85%. That's compared to 25% from its top two customers and less than 66% from its top six customers in the year-ago period.

Those customers are very likely Microsoft, Amazon, Alphabet, Meta Platforms, OpenAI, and Oracle, not necessarily in that order.

It's worth pointing out that not all of those customers are the end users for Nvidia's chips. Microsoft, Amazon, Alphabet, and Oracle are all building out public cloud platforms, renting out their compute capacity to third-party businesses. As a result, the customer base is a bit more diverse. That said, Oracle's cloud buildout is increasingly tied to demand of OpenAI services, while Microsoft has long been intertwined with the generative AI leader.

But OpenAI is signaling it might not rely so much on Nvidia going forward. Despite signing a big deal to buy Nvidia GPUs in exchange for up to $100 billion in capital investment from the GPU leader, OpenAI just signed a huge deal with rival GPU maker Advanced Micro Devices (NASDAQ: AMD). The contract gives OpenAI warrants to buy shares of AMD at $0.01 per share upon meeting certain purchase requirements of AMD chips (among other requirements).

OpenAI plans to deploy 6 gigawatts of AMD GPUs over a multiyear period. It receives a tranche of warrants to buy AMD stock for each gigawatt it buys. In effect, AMD is giving OpenAI a discount on its chips while further entrenching itself in the AI ecosystem. For reference, Nvidia's deal with AI will fully vest if OpenAI buys 10 gigawatts of GPUs. So Nvidia's still in a position to supply the majority of OpenAI's compute, but its dominant share is slipping.

This could be just the start of a new trend

OpenAI's deal with AMD could be one of many for the rival GPU maker. The deal hinges on AMD's forthcoming MI450 line of GPUs, which should come out around the same time as Nvidia's Rubin architecture. AMD is confident that the MI450 will outperform Nvidia in both training and inference, which is a bold claim. At the very least, analysts expect its performance to be competitive, which should be good enough to garner significant market share gains from Nvidia.

Hyperscalers need AMD as a counterbalance to Nvidia, which currently holds tremendous pricing power. If the MI450 is as powerful as management claims, it could mean a huge shift in spending not just from OpenAI, but from Nvidia's other major customers as well. AMD is building rack-level systems that should make it easy for customers to make the switch.

On top of that, Nvidia's customers are also making progress in developing custom silicon solutions. Microsoft is planning to make a significant investment in its next generation Maia300 chip, redesigning it this summer to take advantage of more advanced technology. Meta, likewise, is working to expand the use cases for its custom MTIA chips to generative AI use cases. And OpenAI is planning to develop a custom silicon solution. It's partnering with Broadcom, reportedly planning to spend $10 billion on a custom AI accelerator design.

While investors shouldn't expect any of Nvidia's biggest customers to ditch it entirely, the push to move away from relying on Nvidia is gaining momentum. OpenAI's deal with AMD is likely just the start. With the stock trading at a forward P/E above 40, shares look expensive given the current potential to see a slowdown in revenue growth as customers move away from the GPU giant. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Key Points

• Nvidia has been the biggest beneficiary of AI spending among big tech companies.

• But Amazon and Meta Platforms are two tech giants seeing very strong results from investments in AI, and their future could be even brighter.

• Both trade at compelling valuations, especially compared to how expensive Nvidia has become.

Since October 2022, Nvidia has seen its value increase by more than $4 trillion. To put that into perspective, no other company is even worth $4 trillion today.

The huge surge in value for the maker of graphics processing units (GPUs) stems from a few big tech companies spending hundreds of billions on its chips every year. The four biggest hyperscalers are set to spend around $380 billion on AI infrastructure this year, and they have guided for significant steps up in spending next year.

Nvidia is set to be the prime beneficiary of that increased spending for some time, but that doesn't mean the stock will continue to climb. Market prices are based on what investors expect in the future, and the expectations for Nvidia remain high.

But two other AI stocks look like they could surpass investor expectations, pushing both companies to exceed Nvidia's value by 2030.

Can Nvidia keep climbing from here?

Continued growth in AI spending is giving investors more and more confidence that Nvidia can keep up its torrid sales growth.

The three main public cloud providers all reiterated that demand exceeds computing capacity, which means they will continue to spend growing amounts to meet their customers' needs. Meanwhile, Nvidia is selling chips as fast as it can make them. That led to a 69% rise in revenue in the company's first quarter, and a 59% increase in adjusted income.

But it's unlikely to see growth continue at this pace. All four hyperscalers are working on custom silicon solutions for their own AI training. Microsoft is reportedly planning to shift a significant portion of its spending to its Maia300 chip in late 2026. Meta Platforms (NASDAQ: META) is working on expanding the AI workloads that its custom Meta Training and Inference Accelerating (MTIA) chips can handle.

And on top of all of that, AMD is starting to show progress in catching up to Nvidia, while continuing to offer excellent price performance.

Investors should expect a significant slowdown in sales as Nvidia faces fierce competition for its share of data center servers and it battles with the law of large numbers. As supply-demand forces reach equilibrium, the chipmaker might not be able to command such high gross margins, either. That could weigh on earnings growth.

But with the stock currently trading at more than 42 times forward earnings, investors seem to think those risks aren't going to materialize. I think it's more likely they will keep Nvidia from continuing to outperform the market at such a torrid pace, limiting how much more upside there is from here.

If investors want to buy shares of a big tech company capitalizing on the growth of AI, the following two industry giants present better value with more upside. In fact, I expect they will both be worth more than Nvidia by 2030.

1. Amazon

Amazon (NASDAQ: AMZN) is the largest provider of public cloud computing in the world with Amazon Web Services (AWS), making it one of Nvidia's biggest customers. While the company was caught flat-footed as generative AI took off in 2022, management quickly caught up with the competition thanks in part to its investment in Anthropic.

Management continues to see strong demand for its AI services, with revenue more than doubling year over year. However, AWS's scale has masked that strong growth.

The cloud services segment generated $116 billion in revenue over the last 12 months. That's roughly 55% larger than its next closest competitor, Microsoft. But AWS's 17% year-over-year growth looks disappointing compared to Microsoft's 39% growth in cloud services last quarter. Nonetheless, Amazon has mostly kept its market share despite strong growth by its competitors.

What's more important is that the margin profile on AWS is extremely strong. The operating margin of 36.8% over the last 12 months is up from 33.4% a year ago. And while it took a dip in the second quarter, that's due to the timing of share-based compensation. The long-term trend shows continued improvement in margins.

Meanwhile, Amazon's retail business is becoming very profitable in its own right. The North American segment saw its operating margin climb to 7% last quarter while the international segment's margin came in at 3.4%. Strong top-line growth of 11% for both helped, which was bolstered by high-margin ad revenue growth of 22%.

The long-term trends favor steady revenue growth across Amazon's businesses with particular strength in its high-margin operations (namely AWS and advertising). That should result in earnings growth well above average.

And as its spending growth on AWS slows down, free cash flow should rise to new records by the end of the decade. That gives the company more opportunities to invest for growth, just as it has managed to do throughout its history. The stock currently looks attractive amid a small pullback in price.

2. Meta Platforms

Meta is another major Nvidia customer, but unlike Amazon, it only uses Nvidia chips for its own AI needs. In fact, it might be spending more on its own AI needs than any other company in the world. And Meta's second-quarter results are a clear example of why it's willing to spend so much.

Sales grew 22% last quarter, and its operating margin expanded 5 percentage points. For some perspective, that's faster revenue growth than both Snap and Pinterest despite being a much bigger force in social media advertising. Meta's AI capabilities are a clear reason for the outperformance.

Artificial intelligence has led to better recommendations for both advertisements and organic content. As a result, the company served up more ads and was able to command higher pricing per ad impression. Meanwhile, it's seeing strong uptake of its generative AI tools for ad creation, which makes it easier for marketers to create and test new ideas.

There are a number of other opportunities that AI could unlock. Those include AI chatbots for businesses in WhatsApp and Messenger, which could drive increased click-to-message ads in Facebook and Instagram.

And management has said its Meta AI chatbot built into its apps now has 1 billion monthly active users, giving it yet another surface to monetize with ads. It only recently started showing ads in WhatsApp and Threads. That should give it room to grow supply as demand increases due to its generative AI tools making advertising easier.

Lastly, Meta is at the forefront of development in augmented and virtual reality. AI can unlock a lot of value in an environment that's also aware of your surroundings. The company has already seen strong early adoption of its Meta Glasses with AI built in.

Shares look very attractive with an enterprise value around 16 times forward estimates on earnings before interest, taxes, depreciation, and amortization (EBITDA). While depreciation of its data centers will weigh on its margins, the company is proving the investments are paying off with very strong revenue growth and by unlocking a lot of potential profits in the long run.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Amazon, Meta Platforms, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, Nvidia, and Pinterest. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, Nvidia, and Pinterest. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In general, Warren Buffett has stayed away from tech companies in Berkshire Hathaway's investment portfolio. But one big tech trend has expanded well beyond tech companies: artificial intelligence (AI). AI is everywhere, and if a business isn't using it to improve productivity and reduce costs, it's going to fall behind.

In fact, some of Berkshire's biggest investments are looking to advance AI research, with clear business benefits if they can improve their algorithms and effectively implement new use cases for generative AI. As such, about 40% of Berkshire's $293 billion portfolio is invested in five companies pushing AI forward.

1. Apple (21.8% of portfolio value)

Apple (NASDAQ: AAPL) has been slow to develop generative AI capabilities. After showing off plans for its Apple Intelligence system over a year ago, the company made very slow progress. Meanwhile, other big tech names continue to push new models and capabilities to their platforms, leaving Apple in the dust.

Apple's biggest challenge is maintaining security and privacy for its users. As a result, it's focused on on-device AI. Practically every other AI system relies on remote servers with powerful GPUs loaded with tons of high-bandwidth memory. That makes them much more powerful, but far less private. As a result, Apple's handicapped itself by focusing on capabilities it can run on an iPhone or Mac.

There's still a lot of time for Apple to catch up though. Its ecosystem of products still has very high retention rates, and with an expanding services segment, more and more users are unlikely to give up their iPhone. In fact, that observation is what led Buffett to make his initial investment in Apple. Its strong brand and customer loyalty give it a massive competitive advantage.

Apple is reportedly exploring potential acquisitions that could expand its AI capabilities, including the potential purchase of Perplexity, an AI-powered search engine. With $133 billion in cash and marketable securities on its balance sheet, Apple can afford to make a big acquisition if it needs to.

Apple stock isn't exactly cheap right now, though. The stock currently trades for about 30 times forward earnings expectations. That high price may be why Buffett sold off about two-thirds of Berkshire's stake in the company last year.

2. Amazon (0.8%)

Amazon (NASDAQ: AMZN) was also slow to catch onto the AI trend relative to its peers in cloud computing. It worked quickly to catch up, though, developing Amazon Bedrock and acquiring a significant stake in Anthropic, ensuring access to leading edge models and a massive customer for Amazon Web Services.

Since mid-2023, Amazon's cloud computing segment, AWS, has reaccelerated its growth, driving strong demand for AI services on its platform. In fact, management says it remains supply constrained and committed to spending about $100 billion on capital expenditures this year, mostly going toward building new data centers.

Meanwhile, Amazon's integrated AI capabilities into its logistics network to ensure inventory is well positioned across its warehouses in the United States. That's enabled it to offer more items with one-day shipping for Prime members and reduce its shipping expenses per unit. As a result, Amazon's retail business has seen strong operating margin improvement over the last few years.

Amazon's decision to sink tons of cash into building new data centers to meet the insatiable demand for AI-related compute has weighed on its free cash flow. As a result, the stock looks expensive relative to its free cash flow over the trailing 12 months. But if and when Amazon takes its foot off the gas with capital spending, it should prove a good value at its current price with strong future free cash flows.

3. American Express (15.8%)

Even a company that's 175 years old can still prove an innovator in AI. American Express (NYSE: AXP) looked to incorporate AI across its business, and it's helping improve its operations.

American Express uses AI to help identify and prevent fraud for its customers. Its algorithms can analyze real-time data and help make a decision whether a transaction is suspicious and needs further confirmation or not.

Amex also uses AI to target offers for potential and existing customers. These help improve its marketing efforts, optimizing customer acquisition costs and retention rates.

Internally, Amex integrated AI into its IT support system, which dramatically reduced the number of tickets requiring human intervention. Its travel concierge team also uses generative AI tools to curate travel recommendations personalized for each customer based on their purchasing habits with Amex.

One of the fastest growing sources of revenue for Amex over the past few years has been the annual fees on its cards. Its ability to continue raising the fees on its products speaks to the strength of its brand and its ability to provide better customer experience and create more enticing offers for its customers.

With the stock trading at 20 times earnings, shares still look relatively attractive. The company is pushing its revenue growth higher led by higher annual fees without losing customers, and that's pushing its margins higher as well. As such, the company's expected to produce double-digit earnings-per-share growth.

4. & 5. Visa (1%) and Mastercard (0.8%)

Visa (NYSE: V) and Mastercard (NYSE: MA) are both using AI in similar ways to improve their payments networks. Like Amex, they've each developed their own machine learning algorithms to help prevent fraudulent transactions. But they're also developing tools for AI that could increase the number of transactions on their payments networks.

Visa and Mastercard are developing systems that will enable AI agents to use credit card credentials to make transactions on behalf of individuals or businesses. By working with AI systems to ensure security, both payments networks are positioning themselves to be at the center of advancements in agentic AI capabilities. For example, you could have AI restock office supplies and cater next week's lunch, and it will simply do it without any further input.

Both payments networks are well positioned, winning the vast majority of electronic payments partnerships with credit card issuing banks. As the two largest payments networks, they exhibit strong economies of scale and produce very high margins. And if AI can push more transactions onto their networks, it could see improved revenue and profits over the next few years.

The two stocks trade for much higher valuations than American Express, at 31 times earnings for Visa and 35 times earnings for the smaller, but faster-growing Mastercard. Those valuations may be a bit high for both companies, as they're expected to grow revenue at a high-single-digit to low-double-digit rate with modest operating margin expansion. While both companies have strong competitive moats thanks to their scale, it might be worth holding off for a better price.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Warren Buffett has 40% of Berkshire Hathaway's $293 billion portfolio invested in 5 artificial intelligence (AI) stocks appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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American Express is an advertising partner of Motley Fool Money. Adam Levy has positions in Amazon, Apple, Mastercard, and Visa. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Apple, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool Australia has recommended Amazon, Apple, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Nvidia recently became the first ever $4 trillion company in the world. Its rapid ascension in value stems from growing demand for artificial intelligence.

But Nvidia isn't the only company that's seen its market value soar to multitrillion-dollar levels on the back of AI-fueled growth. The three biggest cloud computing providers -- Amazon, Microsoft, and Alphabet -- all boast market caps above $2 trillion. Meanwhile, Apple remains one of the most valuable companies in the world as it works to catch up on its AI capabilities.

But the $2 trillion club may be about to get a little bigger. One company is showing strong financial results stemming from the rapid advancements of artificial intelligence over the last few years. In fact, I predict it will surpass the $2 trillion market cap milestone before the end of the year.

Here's the AI giant that could join the $2 trillion club.

One of the biggest beneficiaries of generative AI capabilities

I predict that the next member of the $2 trillion club will be Meta Platforms (NASDAQ: META). Not only does it already have a market cap of roughly $1.8 trillion as of this writing on July 24 -- which puts it about 11% from $2 trillion -- but the stock currently looks undervalued relative to the potential opportunities. AI could boost its revenue in the near term while opening up even bigger opportunities in the long run.

During Meta's first-quarter earnings call on April 30, CEO Mark Zuckerberg laid out five major opportunities for the company with AI.

1. Improved advertising: Meta has long used machine learning algorithms to help surface advertisements amid organic content to drive maximum engagement. That's led to steady improvements in ad pricing for the company. It's also rolled out generative AI tools that help marketers come up with creatives (ads). In the pipeline, Meta's developing an AI agent that can take a marketer's objective and budget and create and run the entire campaign for them. That has the potential to save marketers money and increase the total number of companies running ads on Meta's properties, further pushing ad prices higher.
2. More engaging experiences: Zuckerberg details two benefits of AI: better recommendations and new types of content. Meta has expanded its AI model to include more data points across all different types of content to improve recommendations across every surface of its apps, including Facebook, Instagram, and WhatsApp. As it grows the model bigger and bigger, it's getting better and better at engaging users. That's only possible because it now has the compute power to support its large language model development. Zuckerberg also expects generative AI tools to provide new ways for creators to produce better content for users. Everything from existing content like photos and videos can be manipulated with AI, and generative AI could enable creators to produce more interactive content as well.
3. Business messaging: Meta's WhatsApp for Business is a relatively small source of income right now. But as Meta improves its AI agent capabilities, it reduces the cost for businesses to provide customer service and sales through WhatsApp and Messenger. That could lead to a surge in WhatsApp for Business users. One analyst thinks AI agents alone are a $100 billion opportunity for Meta.
4. A stand-alone AI chatbot: Meta has integrated the Meta AI assistant into all of its main apps and released a stand-alone version of the app as well. As the user base grows, it could provide another source of valuable advertising inventory. Importantly, since Meta is developing its own large language model for the above applications already, the additional cost of building and running a stand-alone AI chatbot is far lower than for dedicated AI companies like OpenAI or Anthropic.
5. Devices: Zuckerberg points out the growing popularity of Meta's AI glasses. Unit sales tripled in the first quarter. Longer term, generative AI may be essential for creating an augmented reality user interface that fits into the unique setting of each user.

Indeed, AI has the potential to dramatically impact Meta's financials in a positive direction in the near term while supporting its long-term objectives in virtual and augmented reality.

The stock looks like a bargain right now

The above factors should be able to generate strong double-digit revenue growth for Meta for years to come. The company saw 16% revenue growth last quarter, while exhibiting nice operating leverage. As a result, operating income climbed 27% year over year.

The big step up in capital expenditures could weigh on earnings growth for the next couple of years as depreciation expense climbs as a result. But as the company grows into those expenses, it should continue to show operating leverage.

Meta's also using excess cash flow to repurchase shares. It bought back $13.4 billion worth of its stock in the first quarter, and it still has $70 billion in cash on the balance sheet. As a result, the company should be able to generate strong earnings-per-share growth.

As of this writing, the stock trades for 28 times earnings. Considering the growth potential ahead for the stock, that's an enticing price for investors. To push the stock to $2 trillion, it would have to trade for closer to 31 times earnings, which isn't an unreasonable multiple for the stock. But if Meta ends up outperforming expectations, it could trade for the same multiple and still achieve a $2 trillion valuation.

I expect a combination of multiple expansion and outperformance to drive the stock to $2 trillion before the end of the year.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Meta Platforms (NASDAQ: META) is shaking up its artificial intelligence (AI) efforts and the industry as a whole. Earlier this month, it invested a total of $14.3 billion in Scale AI to take a 49% non-voting stake in the company and bring key personnel into Meta's laboratories. Despite the significant changes this brings to Meta and the industry, it's not what makes the stock a buy today.

Artificial intelligence is extremely important to the future of Meta Platforms, and the potential impact of the technology still seems to be underappreciated by the market. Meta's stock price is attractive, and it would be a buy whether it made the move to invest in Scale AI or not.

What does Scale AI bring to the table for Meta?

Scale AI provides curated and labeled data sets to frontier model developers for AI training. It can also provide evaluation and help improve reasoning models with the help of human experts. It works with many of the biggest names in artificial intelligence, providing key services to ensure they can put out the best products.

Meta's investment includes a commercial agreement to spend $450 million per year on Scale's platform. Meta will likely gain access to proprietary data sets in an industry where good data has become incredibly important. More importantly, though, it brings Scale's founder and CEO Alexandr Wang onto Meta's payroll, where he'll head up a new AI "superintelligence" lab.

Meta has struggled to attract top talent to its AI labs, and the disappointing results of its latest Llama AI model release have made the talent gap more clear. It reportedly offered huge incentive packages to poach OpenAI employees in an effort to win over talent to catch back up with the competition, but most rejected it. With its investment in Scale, Meta is hoping it can correct that issue.

Building a leading-edge model is important for Meta, even though it provides its Llama models to the open-source community, albeit with restrictions for commercial use. CEO Mark Zuckerberg is more interested in the potential the most advanced AI systems could bring to Meta's existing products instead of making a product out of the AI model itself. But to build the best model with the most capabilities, it needs wide adoption from the developer community, and that won't happen if its performance is subpar.

So, adding Wang to the AI team is a great start, but Meta would've likely found a way to attract talent one way or another. The potential value of AI to the company is just too high for it to remain a barrier forever.

Is Meta stock a buy now?

Meta is already working on a service that could be the start of a long runway of AI growth. On Meta's most recent earnings call, Zuckerberg described an AI agent that could take a marketing objective and a budget and take care of creating and running an entire ad campaign by itself. It would design the creative, figure out who to target, and optimize images, videos, copy, and targeting to meet those objectives. It could potentially create individualized ads for Facebook and Instagram users to help marketers meet their objectives with minimal costs.

That's not some far-off dream, either. The company aims to offer the service by the end of next year, according to a report from The Wall Street Journal.

Such a service would not only lead to marketers' willingness to pay for ads increasing (since they won't have to spend time or money on developing ad creatives), but it would expand the number of advertisers. Lowering the barrier to entry should lead more businesses to advertise on Meta's platform, which should support higher pricing for its ads due to higher demand.

On top of that, Meta's ability to generate paid content for its users with artificial intelligence would also mean it can generate highly personalized and engaging entertainment content as well. That could lead to higher engagement rates and more time spent on the platform, increasing the number of ads shown and their value.

Few companies are in as good of a position to capitalize on the potential of AI compared to Meta. Not only does it have a massive platform to deploy its AI capabilities, but it has the capital to invest in the future of AI. Its investment in Scale and move to bring Wang and other personnel in-house is the company using its competitive advantage to its benefit, which is what makes it a great investment. And with the stock trading for roughly 27 times forward earnings, it could prove a bargain at the current price.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Does Meta Platforms' massive $14.3 billion artificial intelligence (AI) bet make the stock a buy now? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Meta Platforms. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Meta Platforms. The Motley Fool Australia has recommended Meta Platforms. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett is one of the most widely followed investment managers in the world. And there's good reason for that. His 60-year run at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has been nothing short of phenomenal. Investors who followed Buffett into the company have realized a compound average annual return of about 20% since Buffett took over the business in 1965. That's nearly twice the average annual return of the S&P 500.

But it appears that Buffett has struggled in recent quarters to find great ways to deploy Berkshire's growing cash reserves. His potential best opportunities are getting only a small amount of capital infusion, as it appears that he's determined that many of the best large-cap stocks are overvalued. As a result, Berkshire put only $3.2 billion of cash into equities in the first quarter, leaving about $347 billion in cash and Treasury bill investments.

Some of that $3.2 billion went into an undisclosed stock exempted from disclosure by the Securities and Exchange Commission. The rest, which appears to be about $1.8 billion, went into seven different stocks reported on Berkshire's quarterly 13F filing.

One of those stocks stands out as an incredible value for investors right now, and it could be worth adding to your portfolio.

Here are the seven stocks Buffett just bought

Buffett admits he would love to buy more stocks. "Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned," he wrote in his letter to shareholders in February. But for Buffett to buy shares in a company, they must be offered, and offered at good value.

Evidently he saw only a handful of stocks that looked like good values last quarter. Here are the seven Berkshire has disclosed so far:

1. Heico
2. Verisign
3. Sirius XM
4. Pool Corp.
5. Domino's Pizza
6. Constellation Brands (NYSE: STZ)
7. Occidental Petroleum

It's worth pointing out that all of these businesses are relatively small. Occidental Petroleum sports the largest market cap of the group at $42 billion. And Berkshire already owns nearly 27% of that company.

Buffett doesn't see a lot of opportunities for Berkshire to invest tens of billions in a great company trading at a fair value. With Buffett strategically selling off some holdings while Berkshire's subsidiaries generate considerable free cash flow, the cash is piling up.

Everyday investors can invest as much money as they want in any of the seven companies above. But some of them are arguably better values than others, especially considering price movements since Buffett's purchases, some of which date all the way back to early January. Of the seven, there's one that looks like a particularly good value right now.

Here's the best of the bunch

All seven companies are great businesses. Each has at least one source of competitive advantage, and they generally trade for good value relative to earnings. But if I had to choose one of Buffett's latest purchases to invest my own money in, it would be Constellation Brands.

Constellation Brands is the owner of top Mexican beer brands like Corona and Modelo. It absolutely dominates U.S. sales for Mexican lagers. It also owns several wine and spirits brands, although its portfolio got a little bit smaller when it divested its mainstream wine brands earlier this month. Constellation is refocusing its portfolio on high-end brands. The beer business is its most important, accounting for over 80% of sales and over 90% of operating income in fiscal 2025.

It has a stranglehold on the Mexican beer import category in the U.S. The company said it accounts for over 90% of spending in the segment. And it's seen strong growth in sales for both Modelo and its smaller Pacifico brands over the past year, despite secular headwinds against the overall beer category. Total alcohol consumption appears to be declining, especially among younger generations, and new entrants like hard seltzer and ready-to-drink cocktails continue to eat into beer's market share.

Those headwinds and a new tariff this year on Mexican imports into the United States have led many investors to sell the stock. A disappointing earnings report in January didn't help, either. The stock currently trades more than 20% below where it started the year.

But the outlook for the business is strong. Management expects sales growth in the low-single-digit range over the next three years as the wine and spirits business continues to drag down the beer business. Strategic divestments over time could refocus more of the business on higher-margin and growth opportunities. Overall, management also expects its operating margin to expand 1 to 2 percentage points from last year's levels by 2028.

The expected net result is $6 billion to $7 billion in free-cash-flow generation over the next three years, and management has earmarked about $4 billion of that for share repurchases. That would reduce its current share count by over 13% at its current price. Management forecasts it'll buy up about 9% of shares outstanding over the next three years, with expectations that the price of the stock will rise.

Given the resilience of Constellation's beer brands and management's focus on capital returns and high-margin opportunities, investors should see strong earnings growth after adjusting for divestments. Nonetheless, the stock trades for less than 14 times forward earnings estimates. That makes it worth considering as an addition to any value investor's portfolio right now.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Warren Buffett just spent $1.8 billion on 7 stocks. Here's the best of the bunch appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway, Domino’s Pizza, and VeriSign. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Constellation Brands, Heico, and Occidental Petroleum. The Motley Fool Australia has recommended Berkshire Hathaway and Heico. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Nvidia (NASDAQ: NVDA) has seen its sales soar on the back of a few big customers spending heavily to outfit data centers with as many of the chipmaker's GPUs as they can buy. Its top three customers accounted for 34% of sales last year.

Amazon (NASDAQ: AMZN) is likely one of those big customers. The cloud computing giant spent over $93 billion in capital expenditures over the last 122 months, primarily focused on building out data centers for artificial intelligence (AI). That number will climb above $100 billion this year. While there's a lot of overhead, including buildings, server racks, networking equipment, and more, a good chunk of that spending goes to Nvidia for its leading-edge GPUs.

But Nvidia's chips aren't the only ones Amazon uses in its servers, and the company just sent a signal that a competitor could be taking up more space in its data centers this year.

Amazon's newest AI investment

Amazon was caught flat-footed as generative AI took off in late 2022, but it's invested heavily to catch up with its competitors ever since. It made a $4 billion investment in Anthropic early last year, and it added another $4 billion in November. The most recent deal included a strategic partnership where Anthropic will use Amazon's custom silicon for large language model training and inference.

Amazon's custom AI chips are designed in partnership with Marvell Technologies. Marvell also makes networking chips and other data center chips among a broader silicon portfolio. Amazon made a small equity investment in the company in late 2021 well before it chose the chipmaker for its custom Trainium and Inferentia chips.

Amazon recently made another AI investment. Its first-quarter 13F filing with the SEC revealed a purchase of 822,234 shares of Advanced Micro Devices (NASDAQ: AMD). Those shares are worth about $90 million at today's price, which isn't a huge investment for a company generating tens of billions of dollars in free cash flow every quarter. However, that's still enough to make it Amazon's third-largest marketable equity holding in its portfolio.

AMD is Nvidia's closest competitor when it comes to advanced GPUs. It's also the only company Intel has licensed to use its x86 CPU architecture, which is essential for Windows PCs and servers. The chipmaker is well positioned to gain market share on both fronts (GPUs and CPUs), and Amazon's equity investment could signal an acceleration in AMD's sales to the largest cloud computing company in the world.

A $500 billion market

AMD CEO Lisa Su believes the AI accelerator market -- which includes GPUs and custom silicon solutions like Marvell's -- will grow at an average rate of 60% per year from 2025 through 2028 to reach $500 billion. While Nvidia will likely take the bulk of that spend, smaller companies are positioned to gain market share over that period with improved price performance. Not to mention, AMD and other chipmakers offer cloud providers a chance to diversify away from reliance on Nvidia, ensuring Nvidia's chip prices don't balloon out of control.

Indeed, AMD recently struck a deal with Oracle to deploy a cluster of 30,000 AMD MI355X accelerators, which helped push AMD's data center segment revenue 57% higher year over year in the first quarter. AMD's existing data center partnerships for its EPYC CPUs with all the hyperscalers put it in a great position to expand those relationships with its Instinct GPUs.

On top of the opportunity in GPUs, AMD has become a leading provider of CPUs for cloud computing. That can be attributed to Intel falling behind in technological capabilities relative to Taiwan Semiconductor Manufacturing, where AMD prints its chips. As a result, AMD can offer better price performance with its more power-efficient chips.

With better CPUs and a competitive GPU lineup, AMD should continue to take up more and more real estate in the hyperscalers' data centers.

Investors can buy AMD stock today for 27-times forward earnings. That's a premium to the overall market, but a discount relative to Nvidia, which trades closer to 32-times earnings. That said, Nvidia continues to grow faster than AMD thanks to its pricing power and scale, so it may deserve a premium to AMD.

Amazon very likely bought shares at a better valuation than investors can get today, but its stake in AMD is a strong indication that the chipmaker is continuing to make progress in gaining market share. Given AMD's solid CPU business and the upside potential of gaining share in the fast-growing AI accelerator market, the stock looks less risky than Nvidia at its current price.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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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. Adam Levy has positions in Amazon and Taiwan Semiconductor Manufacturing. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Amazon, Intel, Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Marvell Technology and has recommended the following options: short May 2025 $30 calls on Intel. The Motley Fool Australia has recommended Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett has overseen the investment portfolio at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) for 60 years. In that time, he's produced mind-boggling returns for shareholders.

Since Buffett took over the company in 1965, Berkshire shares have returned an average of 20% per year. Over the course of 60 years, that adds up to a whopping 6,135,058%. Even if you had waited until the end of the trading session when Berkshire announced Buffett's takeover and bought a single $18 share, it'd be worth over $750,000 as of this writing.

That's why the investing world pays close attention to the moves Buffett and his team of investment managers make in Berkshire's portfolio. Unfortunately, the Oracle of Omaha has been selling much more than he's bought over the last two and a half years. The last big investment he made was in Alleghany Corp. in 2022, which Berkshire acquired for a value of $11.6 billion.

At the company's annual shareholder meeting earlier this month, Buffett said he and the team came pretty close to spending $10 billion recently, which would have been Berkshire's biggest acquisition since Alleghany. But one thing held him back and continues to hold him back from making any big investments right now.

The only two things Buffett looks for in an investment

Buffett contends that investment decisions aren't as complicated as some experts might lead you to believe. In fact, he says a decisions can be downright easy as long as there are two things in place.

"We'd spend $100 billion," Buffett told the audience after revealing Berkshire came close to a $10 billion deal. "Those decisions are not tough to make when something is offered that makes sense to us and that we understand and offers good value."

If the business is understandable and offered at good value, Buffett will buy it. Perhaps in more recent years, there should be a caveat that Buffett probably isn't looking at deals unless they're in the $10 billion range or bigger. Buffett later commented, "$10 billion wouldn't have done that much," referencing Berkshire's approximately $630 billion in liquid assets between its cash and equity portfolio.

But Buffett's simple investing philosophy has led to unparalleled long-term success, and it's not like the 94-year-old has completely lost touch with how businesses work. The explanation for why it's been so tough for Buffett to invest a lot of money recently is that there's not a lot of value in the market, especially among bigger companies.

A very opportunistic business

To run a business like Buffett runs Berkshire Hathaway requires being very opportunistic. Buffett and his team have to spot an opportunity and be prepared to take advantage of it when it arises. A good opportunity rarely lasts very long.

"Occasionally, very occasionally, I don't know when it will happen, it could be next week, it could be five years off, but it won't be 50 years off, we will be bombarded with offerings that we'll be glad we have the cash for," Buffett said at the meeting.

All this is to say that if you want to outperform a benchmark index like the S&P 500, you have to wait for the right opportunities. That said, Buffett says there's nothing wrong if an investor wants to buy an index fund and keep all of their money passively invested. In fact, that's what he's instructed the executor of his estate to do.

But for investors looking for an opportunity to buy individual stocks, the opportunities are few and far between. The S&P 500 trades for a very high valuation relative to its historic average. Its forward P/E ratio of 20.4 sits well above the mid-teen level investors are used to seeing. The CAPE ratio, which looks at the last 10 years of inflation-adjusted earnings, has climbed above 35, while it typically sits around 20.

But average investors have a big advantage over Buffett -- they can go small. Smaller companies aren't nearly as expensive as the biggest stocks in the market right now. Buffett would agree, as the purchases he has made over the last two and a half years have all been near the bottom end of any company Berkshire could consider to move the needle. The small-cap S&P 600 and mid-cap S&P 400 both trade closer to the 15 times forward P/E investors are used to, so it's worth looking for opportunities among these sectors.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Bill Ackman is one of the most widely followed investment managers in the world. He's in charge of Pershing Square Capital, a hedge fund focused on investing in just a handful of Ackman's best ideas. His highly concentrated portfolio is full of great companies, but he might have just made one stock the biggest holding at Pershing Square.

Starting in January, Ackman and his team strategically acquired 30.3 million shares of Uber Technologies (NYSE: UBER). Those shares are worth over $2.3 billion as of this writing, as the news of Ackman's position sent shares higher. Based on Pershing Square's positions disclosed in its most recent 13-F filing (as of Sept. 30) with the Securities and Exchange Commission, Uber could now be Pershing Square's largest equity holding.

Ackman loves the management and thinks it's undervalued

In a post on X revealing his position, Ackman praised Uber CEO Dara Khosrowshahi. He said Khosrowshahi "has done a superb job in transforming the company into a highly profitable and cash-generative growth machine."

Indeed, since getting behind the wheel as Uber CEO in 2017, the company has gone from burning $1.5 billion in cash per year to generating over $7 billion in operating cash flow in 2024. Adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) went from negative $2.6 billion in 2017 to positive $6.5 billion in 2024. It's also been profitable on a generally accepted accounting principles (GAAP) basis since 2023.

And Ackman thinks there's still a lot of growth left to come for Uber. "Remarkably, it can still be purchased at a massive discount to its intrinsic value," he wrote.

Even after the increase in share price following Ackman's announcement, Uber shares trade for an enterprise value of 0.9 times its 2024 gross bookings. Management expects gross bookings to grow 18% in the first quarter of 2025 as well. Enterprise value-to-EBITDA, a more traditional valuation measure, has shares trading at a multiple of less than 18 times analysts' 2025 expectations. Management expects 30% to 37% growth in EBITDA in the first quarter.

Uber's management has done a great job of steering the company toward profitability and driving it forward. The stock valuation looks attractive as well. Importantly, it has a big competitive advantage that should protect it from competition entering the market in the future.

Owning the biggest and best in the industry

One thing Khosrowshahi has done at Uber is transform the company from a company focused primarily on ride-sharing to one that matches customers with drivers to move anything from point A to point B. The company also folded Uber Eats into the main Uber app and made several strategic acquisitions in delivery and logistics.

The results have been phenomenal. Since Khosrowshahi took over in 2017, Uber has grown from 62 million monthly active platform consumers to 171 million as of the end of 2024. That customer base has attracted more restaurants, stores, and drivers to its platform, in turn making Uber more useful for customers and spinning the flywheel faster.

As a result, it's taken share from smaller rival Lyft over the last few years despite already being much larger. And Uber's size advantage should continue to push its market share higher. There's a good reason Uber's valuation is higher than Lyft's.

Many see autonomous vehicles (AVs) as a threat to Uber, but Uber's position as the ride-hailing app could make it an indispensable part of the AV ecosystem. If a company like Alphabet's Waymo wants to serve a new market, its easiest path forward is to partner with Uber. And that's exactly what it's doing this year in Austin and Atlanta. There's no need for an AV company to partner with a smaller network operator like Lyft.

So, not only does Uber look undervalued based on its current position in the ride-sharing industry, but it could also see its position cemented as the market shifts to more AVs in search of riders. As such, it may be worth following Ackman into the stock, even after the price spiked on the news of his purchase.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet and Uber Technologies. The Motley Fool Australia has recommended Alphabet. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The S&P 500 (SP: .INX) has experienced a strong recovery since the index hit a relative low in October 2022. Over the past 27 months, the benchmark stock index has soared roughly 69% higher. Yet, many investors have likely seen their personal portfolios fall short of that benchmark due to a phenomenon unseen in more than 40 years.

In 2024, just 28% of stocks in the S&P 500 outperformed the overall index. That's the second-lowest reading available dating back to 1980. The only year where fewer components outperformed the index was 2023, when 27% did better than the index's return.

With just a handful of stocks doing better than the S&P 500, investors who haven't owned the biggest and best-performing stocks over the last 27 months have fallen behind. The S&P 500 is now more concentrated among the top 10 constituents than ever before in history. And if the past is any indication of what to expect, it could signal a big move in the stock market in 2025.

Here's what history says happens next

When only a small minority of stocks outperform the S&P 500 index, it's a clear sign of growing market concentration. The last time we saw back-to-back years where the market saw just a few stocks drive returns for the entire index was in 1998 and 1999.

A couple of notable things happened in the years following.

First, as many investors know, the index peaked in early 2000. The dot-com bubble popped, and high-flying tech stocks were hit hard. The S&P 500's value was cut in half by October 2002, while the Nasdaq Composite Index (NASDAQ: .IXIC) dropped 78% from peak to trough. The growing market concentration and high valuations of the biggest companies in the market are two big reasons why analysts have muted expectations for the future returns of the S&P 500 over the next decade.

But the other notable factor could provide a valuable insight for investors. Many stocks in the S&P 500 actually held up better than the overall index. Over 60% of the constituents in the S&P 500 did better than the index in 2000, 2001, and 2002, and a majority continued to outperform through 2005. In other words, the trend reversed, and the market broadened out.

Will the trend reverse in 2025?

It's impossible to say when the market will broaden out or if we'll see a downturn in the market over the next few years. However, there are some signs that the trend could reverse in 2025 beyond the fact that the market has reached record levels of concentration.

U.S. money supply is growing at an accelerating rate. As the Federal Reserve continues to bring down interest rates, we should see more stable money supply growth, which is a strong predictor of the market broadening. It makes sense economically, as easier access to cash makes it easier for smaller companies to invest and grow. The biggest companies have a massive advantage right now because they have boat loads of cash on hand and can invest in things like artificial intelligence (AI).

That said, the Federal Reserve wants to see more signs of inflation coming down before it continues cutting rates. Trade policies from the new administration have the potential to exacerbate inflation, so we may have to wait and see how actions like tariffs play out.

For long-term investors looking to hedge the significant concentration in the market and the potential trend reversal, there's a simple solution.

The easiest way to put the odds on your side

If you expect the trend to reverse from a small minority of stocks outperforming the S&P 500 to the majority of stocks outperforming, there's a simple exchange-traded fund (ETF) you can buy that will end up performing better than the S&P 500. You can buy an equal-weight S&P 500 index fund like the Invesco S&P 500 Equal Weight ETF.

The equal-weight S&P 500 index buys an equal amount of every constituent in the S&P 500. So, instead of the top five companies accounting for over 27% of the index's value, they account for a combined 1% of the total value — the same as the smallest five companies in the S&P 500. The index rebalances every quarter when the S&P 500 adds and removes new constituents.

Naturally, when the majority of stocks outperform the overall index, the market broadens and the equal-weight index outperforms. That's exactly what happened in 2000 through 2005. While the S&P 500 produced a total return of -6.6% during that period, the equal-weight index produced a total return of 59.2%.

Data by YCharts.

The Invesco index fund is one of the best ways to invest in the equal-weight S&P 500 index. It charges an expense ratio of just 0.2%, and the fund managers have avoided passing on any capital gains to shareholders since its inception, ensuring no tax drag on your investment.

Over the long run, the equal-weight index typically outperforms the capitalisation-weighted index because smaller companies are usually able to grow faster than larger companies. While it hasn't fared well recently, it currently looks like a great opportunity to invest in an ETF tracking the index before the trend reverses.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett is one of the most widely respected investment managers in the world. His track record, dating all the way back to the 1950s, is hard to argue with. As the manager of Buffett Limited Partnership, he produced compound annual returns over 25% for investors. And since taking over Berkshire Hathaway in 1965, he's produced a compound annual return of 20% over the last 59-and-a-half years.

Despite Berkshire shares rising 25.5% in 2024, beating the S&P 500, the stock might have performed even better if Buffett made a few different investment decisions. Specifically, Buffett oversaw the sale of at least $134 billion worth of equities in 2024, and that's before the final tally for the fourth quarter (Q4) was known. Meanwhile, Buffett's stock purchases for the first nine months of the year came to a total of just $5.8 billion.

Many see Buffett's massive stock sales as a warning to investors that stocks are overpriced right now. But there's a clear reason why Buffett's stock sales have completely dwarfed his purchases recently. Buffett once again pointed to the area of the market where he feels there's great value with some of his most recent purchases. In particular, he bought shares in two companies — purchases that totalled about $200 million in late December and early January. Here's the real message investors should take away from Berkshire's 2024.

Buffett's most recent investments

Between December 17 and January 3, Buffett and his team of investment managers at Berkshire Hathaway made several investments. We know about them because the company had to file a disclosure with the Security and Exchange Commission (SEC) as a greater-than-10% shareholder. Here are the purchases and how much Berkshire paid:

• 8.9 million shares of Occidental Petroleum ($409 million).

• 5 million shares of Sirius XM ($107 million).
• 474 thousand shares of Verisign ($94 million).

Berkshire owns preferred shares of Occidental Petroleum with warrants to buy the common stock at $59.62. Occidental is slowly retiring those shares and warrants, so it's kind of a surprise Berkshire Hathaway isn't buying more shares at prices below that level.

The other two purchases, Sirius XM and Verisign, point to a much broader pattern of purchases for Berkshire Hathaway in 2024. Specifically, they're not particularly big companies. Sirius XM has a market cap of $7.5 billion as of this writing. Verisign's worth just over $20 billion. And that might be why Berkshire was only able to snatch up $200 million worth of the shares in the open market recently. The company might have wanted to buy more but couldn't.

It's worth pointing out Verisign's share price increased 5.3% over the course of Berkshire's purchases while the S&P 500 fell 2.2% during that period. The combination of Berkshire's buying volume propping up the price and its disclosure creating investor excitement around the name likely contributed to the considerable outperformance of the shares.

The big challenge facing Warren Buffett and Berkshire Hathaway

Earlier in the year, Buffett bought shares of Domino's Pizza ($15 billion market cap), Pool Corp ($13.5 billion), and Heico ($29 billion). Even Occidental only has a market cap of $47 billion.

The fact that Buffett sees more value in smaller companies' stocks presents a challenge for him and Berkshire Hathaway. If Buffett decides to sell Apple, he can easily liquidate $75 billion worth of the $3 trillion-plus company. He did just that in Q2 last year. But finding a suitable stock to reinvest that $75 billion is an impossible task.

Buffett warned investors of the situation at the start of the year in his letter to shareholders:

There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can't. And, if we can, they have to be attractively priced.

At this point, the largest companies in the market aren't very attractive from a valuation standpoint. The "Magnificent Seven" are currently the seven largest companies by market cap. They have a combined forward price-to-earnings (PE) ratio of 29.8. The biggest banks in the world have seen their price-to-tangible book value climb significantly higher over the last 18 months, which led Buffett to start selling Berkshire's Bank of America stake. Buffett even stopped buying back Berkshire Hathaway shares in Q3, implying he sees his own company's stock as overvalued.

Smaller companies, on the other hand, can still present great value. Sirius XM, for example, trades for 7.4 times analysts' consensus estimate for 2025 earnings. Verisign and Domino's trade for about 24 times forward earnings. And if you look at even smaller companies, many trade for even better valuations. The S&P 400 mid-cap index has an aggregate forward PE of 16.3 as of this writing. The small-cap S&P 600 trades for 15.8 times forward earnings.

The problem for Berkshire Hathaway is that it can only buy so much of a small- or mid-cap company without moving the market. An individual investor, on the other hand, can probably buy as much of these companies' stocks as they want.

The clear message investors should take away

Warren Buffett's massive stock sales and minimal purchases in 2024 aren't a warning to investors to get out of stocks as quickly as they can. It's much more subtle. Investors just need to be more diligent about valuing the stocks they buy, and more and more of the good values in the market are smaller companies.

That's not too surprising. Stock market concentration reached unprecedented levels at the end of 2024, as the biggest companies got bigger, leaving the rest of the market behind. But as earnings multiples for large-cap stocks have expanded over the last few years, investors haven't extended the same multiple expansion to smaller businesses — even "small businesses" worth $25 billion.

There are a lot of opportunities in small- and mid-cap stocks. Buffett seems to favour value stocks in particular, which both the S&P 400 and S&P 600 favour due to profitability requirements for inclusion in the indices. If you don't have the inclination to research individual stocks, you might consider overweighting index funds tracking the S&P indices in your portfolio.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Apple. Bank of America is an advertising partner of Motley Fool Money. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Bank of America, Berkshire Hathaway, Domino’s Pizza, and VeriSign. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Heico and Occidental Petroleum. The Motley Fool Australia has recommended Apple, Berkshire Hathaway, and Heico. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Bill Gates would be worth well over $1 trillion today if he never gave up a single share of the 45% stake in Microsoft (NASDAQ: MSFT) he held just after the company's 1986 initial public offering (IPO). Over the last 39 years, however, he has strategically sold off shares of the company he founded to diversify his personal investments and donate much of his wealth to charity.

Most of Gates' charitable donations go to the Bill & Melinda Gates Foundation, which aims to enhance healthcare and reduce poverty around the world. Gates isn't the only billionaire donating to the foundation. Warren Buffett has made an annual contribution since 2006. The CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) also served as a trustee until 2021.

The foundation's trust includes an equity portfolio with a value of about $44 billion as of this writing. Roughly two-thirds of that portfolio is invested in just three stocks.

1. Microsoft (29%)

You might not be surprised to find that Microsoft, the company Gates co-founded, is the largest holding in his foundation's trust. But that wasn't true for most of the foundation's life.

In fact, Microsoft remained notably absent from the foundation's portfolio disclosures between 2002 and 2017, when Gates made his first donation of Microsoft shares since 2000.

Gates added to the donation in 2022, and the trust held nearly 29 million shares as of the end of September. Those shares are worth about $12.5 billion as of this writing.

The trust only recently started selling the 2022 infusion of shares to fund its grants and operations, reducing its stake by about 26% over the last four quarters. But as Microsoft shares have soared in value, they remain its top holding.

The stock price is up over 60% since July of 2022, when Gates last donated shares. That performance was driven by its strong position at the forefront of generative artificial intelligence (AI).

Microsoft made an early investment in OpenAI, the creator of ChatGPT. It added to its investment in early 2023, positioning itself as the top choice for developers looking to use its public cloud offerings to create their own AI-powered applications.

Azure, Microsoft's cloud computing segment, saw revenue accelerate to 33% growth in its most recent quarter. And management expects even faster growth in the quarters ahead as its big capital investments in data centers come on line later this year.

Meanwhile, Microsoft remains a leader in enterprise productivity software and PC operating systems. That gives it a great platform to sell its Copilot AI services to hundreds of millions of potential customers. Adoption is rising quickly, with sequential growth exceeding 50% across its portfolio of Copilot options.

Microsoft shares currently trade for around 33 times forward earnings. That's a significant premium to the overall market, but it is worth the premium price. The company leads the market in two important AI areas (cloud computing and enterprise software) with accelerating growth.

Meanwhile, it produces significant free cash flow, which management uses to buy back shares, increasing the value of future earnings to remaining shareholders.

2. Berkshire Hathaway (23%)

Warren Buffett has made an annual contribution to the Bill & Melinda Gates Foundation since 2006. It always comes in the form of Berkshire Hathaway Class B shares. Buffett converts his super-voting Class A shares to Class B in order to donate his wealth without losing control of his company.

As of the end of the third quarter, the Gates Foundation trust fund held about 22 million shares of Berkshire Hathaway. Those shares are worth about $10 billion as of this writing.

The foundation will likely sell some of those shares before Buffett's next donation this summer. The Berkshire CEO stipulates the Gates Foundation must disseminate the entirety of his donation each year, plus an additional 5% of its net assets. Nonetheless, the trustees have worked to maintain a substantial stake in the conglomerate by selling off other assets.

Much of Berkshire's value is tied to its massive investment portfolio. The company holds equities valued around $300 billion, as of this writing.

It also holds about $325 billion in cash and Treasury bills. Buffett has been selling some of the company's biggest holdings in favour of the safety of Treasuries over the last two years as stock prices have soared higher. Meanwhile, Berkshire Hathaway's wholly owned businesses have produced strong results. Operating income grew 17% year over year through the first nine months of 2024.

The strong performance of Berkshire's core operations and the overall stock market propelled shares 27% higher in 2024, slightly outperforming the S&P 500. But Buffett's valuation concerns for many of Berkshire's top holdings have also extended to Berkshire Hathaway shares themselves in recent months. For the first time since 2018, Buffett decided not to buy back a single share of his company's stock in the third quarter of 2024.

While shares have come down in valuation from their high in the third quarter, the price still remains relatively high compared to its historical levels. They currently trade for about 1.6 times book value. But considering Berkshire Hathaway is holding $325 billion in cash and producing very strong operating results, it could be worth the premium price.

For what it's worth, the vast majority of Buffett's net worth remains tied to Berkshire Hathaway.

3. Waste Management (15%)

Waste Management (NYSE: WM) is one of the longest-held stocks in the Gates Foundation's trust, and the trustees have continuously added to that over the years. The foundation held 1.2 million shares in 2022, and that number was 32.2 million shares as of the end of last September.

And that's after the trustees sold 3 million shares in the third quarter (just its third sale since 2002). Those shares are worth about $6.5 billion as of this writing.

It isn't an exciting business, but that doesn't mean investors shouldn't be excited about the stock. Its dominant position in waste disposal stems from its landfill holdings. With significant regulatory hurdles for buying and creating new landfills, it's unlikely new competitors will challenge Waste Management anytime soon. In fact, third parties pay the company fees to use its landfills and other assets.

Waste Management's position gives it a few ways to grow earnings. First, it has significant pricing power, as exemplified in 2021 and 2022. It was able to raise prices to more than keep up with inflation. Second, its scale allows it to create denser routes for trash and recycling pickup, improving the profitability of its operations relative to smaller competitors. Lastly, it can acquire tangential and competing businesses, as it recently did with medical waste specialist Stericycle.

Management has executed on all three fronts in recent years. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) grew 11% in the third quarter on the back of record profit margins. Going into 2025, the company expects "a significant step change in revenue, earnings, and free cash flow." In December, it was confident enough to increase its dividend 10% for the year.

The stock currently trades for an enterprise-value-to-EBITDA ratio of 16. That's roughly in line with its five-year average, and on par with its biggest rivals in the space. But considering the strong outlook for 2025 and beyond, it may deserve a premium price. There's a reason the Gates Foundation has held on to shares of Waste Management so long. It's a solid stock: a great business trading at a fair price.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Billionaire Bill Gates has 66% of his foundation's $44 billion portfolio invested in 3 phenomenal US stocks appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Waste Management and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Berkshire Hathaway and Microsoft. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The monthly cost of being a diehard Apple (NASDAQ: AAPL) fan is going up.

Apple recently announced price increases for Apple Music and Apple TV+, charging subscribers $1 or $2 more per month. Apple is pushing those price increases into the Apple One bundle as well, which also includes Apple Arcade, Apple News+, iCloud, and more.

What's not going up in price? The iPhone.

These price changes, or lack thereof, can tell investors a lot about how Apple is positioning itself for the future.

Apple is sacrificing device profits

The cost of everything has gone way up over the past year due to inflation, and the iPhone is no different. Estimates indicate the bill of material for the iPhone 14 Pro Max was 20% higher than that of the 13 Pro Max.

The cost of all the components found inside that little glass rectangle totaled nearly 46% of Apple's asking price this year. That's the highest cost of material relative to its price Apple has paid for any Max model.

Instead of passing on the increased costs to consumers, Apple decided to keep the price of all its iPhone models the same. With competitors increasing prices and inflation running rampant, it means Apple made its iPhones much more attractive in terms of price.

That's a bold move for a company that generated 52% of its revenue from the iPhone over the past year. It's not just the iPhone, either. Apple notably also gave Apple TV device purchasers a price cut on its new 4K Apple TV, which now starts at just $129.

And while the new iPads have a higher starting price, Apple is keeping the old model in the lineup at its current price. That's a move the company has made with other hardware lineups, including the Mac, in order to maintain affordable pricing.

The push toward more profitable services

It was just a few years ago that Apple TV+ was seen as a clever way to incentivize new iPhone purchases. Apple launched the service with a generous 12-month trial for anyone who bought a new Apple device.

But the recent price hike indicates Apple is serious about making the streaming service a profitable endeavor. It's making major licensing deals with sports leagues and its prestige original content is starting to gain traction with a broad audience. It's also looking into adding advertising to the platform.

The margin profile on the overall services business is extremely attractive, even considering the significant losses it's likely incurring on newer efforts like Apple TV+. Apple's services gross margin over the past year was 71.7%. That's nearly twice as high as its 36.3% device gross margin.

Gross margin for the services business continues to expand, and it'll likely expand further as Apple pushes prices higher. All told, services accounted for nearly one-third of total gross profit at Apple over the past year. And services will likely account for an even greater percentage going forward as Apple aims to increase pricing.

So, keeping device prices as low as possible, even to the point of sacrificing margin on its biggest revenue source, can help drive overall sales and grow the user base of Apple device owners. With a bigger base to sell its services to, Apple can maximize its most profitable (and still increasingly profitable) segment, services.

The recent pricing decisions offer clear evidence that Apple sees services as the core profit driver going forward.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Apple's latest price changes tell investors a lot about the future of the company appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Everyone wants to have a comfortable retirement without worrying about having enough money to cover their regular expenses, and enough left over to fund hobbies and a few vacations. But some of those same money anxieties can stop you from investing for retirement.

Here's the thing, though. Investing is crucial to retiring rich. Stockpiling cash alone probably isn't enough to get you to retirement with enough savings, and even then, eschewing investing in retirement could lead you to run out of money.

Why you need to invest for retirement

Which of these scenarios sounds more feasible?

1. Save $25,000 per year for 40 years
2. Save and invest $3,000 per year for 40 years

Obviously saving $3,000 is easier than saving $25,000. But by investing that $3,000 in the stock market -- even in something as simple as an index fund -- you'll be able to end your 40-year career with about the same amount of money as you would if you'd stuck $25,000 of cash into a savings account every year.

Over the last 50 years, the S&P 500 has produced a nominal return of 9.4%. At that rate, $3,000 per year will turn into more than $1.1 million in 40 years.

In fact, if you want to retire rich, you'll probably need a lot more than $1.1 million 40 years from now. Even with modest inflation of 2.5%, that amount will be worth just a bit more than $400,000 in today's dollars. So, saving $25,000 in cash may not even be enough to get you to retirement in 40 years.

Staying there

You might have heard of the 4% rule. It's a simple way to figure out how much you can spend in retirement. If you hold a portfolio evenly split between stocks and bonds, you'll be able to withdraw 4% of the starting amount every year without running out of money during a typical 30-year retirement.

Now, you may be thinking, won't I be able to withdraw 4% for 25 years if I just leave everything in cash? Of course you could, but that strategy has a few big problems. First of all, there's no inflation adjustment. The 4% rule includes inflation adjustments, so if we have a year of high inflation, you'll be able to maintain your quality of life by withdrawing a bit more from your portfolio.

Second, the all-cash strategy guarantees you'll run out of money at 25 years. What if you're still alive and kicking 25 years post-retirement? You'll be relying entirely on social security. That's not what anyone would call a "rich retirement."

In the vast majority of cases, the 4% rule results in a portfolio nominally larger than the starting portfolio after 30 years. That protects you against living a very long life, may give you some buffer for unexpected expenses later in life, and ensures you have something to leave to your heirs.

Investing your cash is the only way you can realistically obtain enough savings to retire with enough money to fund your living expenses, vacations, and hobbies. And if you don't stay invested through retirement, you'll probably run out of money and find yourself pinching pennies later in retirement.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Investing is crucial to retiring rich. Here's why appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

About three months ago, Apple (NASDAQ: AAPL) made a small but notable change to its corporate structure. Its VP of advertising, Todd Teresi, started reporting directly to Eddy Cue, who oversees all of Apple's Services business.

That's apparently just the start of a big push for the advertising business. Since then, Apple's made more moves to grow the business, and Teresi said his goal is to grow the business to more than $10 billion in annual revenue.

Two recent changes

Apple currently advertises in the App Store, News, and Stocks apps. But the success of its big-tech companions in advertising suggests it can build a much bigger ad business.

Apple's advertising business is relatively small for a company with an installed base of over 1.8 billion devices. The company currently generates about $4 billion in annual revenue, which pales in comparison to advertising giants like Meta Platforms, Alphabet, or even Amazon. The smallest of that group, Amazon, has an advertising business nearly an order of magnitude larger than Apple.

That will start with Apple's plans to expand advertising inventory within the App Store. Apple currently shows display ads when someone clicks the Search tab on the App Store, and it has promoted listings in the search results.

Soon, it'll show display ads on the Today tab, which provides personalized suggestions for new apps to download. It'll also start showing display ads within third-party app pages, which means apps will be able to advertise their product on their competitor's product page.

The second big change in the app business is a new job listing spotted by Digiday. The company is looking to build a demand-side platform, also known as a DSP. A DSP would allow marketers to automate ad purchases across Apple's inventory, which can lead to greater ad spending. It could also attract advertisers with smaller budgets, increasing competition for each ad spot, leading to higher average ad prices. Owning its own advertising technology can also lead to higher operating margins for the ad business.

Where does Apple go from here?

Apple has a lot of opportunities to insert more advertising into the apps and services iPhone users interact with most often.

It's reportedly already explored the potential for advertisements within Maps. That could include sponsored search listings as well as highlighting locations along a route or an area of focus.

Other potential areas for advertising, as Bloomberg's Mark Gurman points out, include Podcasts and Books. Both have search and discovery features, which could lend themselves well to straightforward display and keyword advertisements.

Expanding the ad business could also lead to things like a podcast advertising network or video ads on Apple TV+. In fact, Apple's already responsible for selling a small amount of commercials during its Friday night baseball broadcasts on Apple TV+. Apple could expand that to more ad-supported video content in the service in the future.

Another interesting long-term opportunity is building an internet search engine a la Google. While Apple has a lucrative contract with Google today, the search giant could face regulatory pressure in the future, ending such deals.

Teresi's goal of reaching $10 billion in ad revenue shouldn't be too difficult. And with the high margins of digital advertising, it could play a significant role in growing Apple's bottom line over the next few years.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Apple sees this business reaching $10 billion soon appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet (C shares), Amazon, Apple, and Meta Platforms, Inc.  The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Meta Platforms, Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix (NASDAQ: NFLX) surprised investors when management shared its plans to start offering an ad-supported tier of the streaming service in the near future. The company has long eschewed the idea of advertisements on its platform, but it's gotten to work quickly as it looks to stem subscriber losses.

Importantly, the company is looking to partner with other companies in order to streamline the operation. "We can be a straight publisher and have other people do all of the fancy ad-matching," co-CEO Reed Hastings said during Netflix's first-quarter earnings call. With the massive popularity of Netflix, those "other people" could have a big opportunity ahead.

Here are four companies that could benefit from Netflix's advertising plans.

1. Alphabet

Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google is an absolute beast when it comes to digital advertising. That said, its premium video advertising experience is limited. While YouTube generated $29 billion in ad revenue for the company last year, Netflix might want more premium advertisements than the standard ad seen next to user-uploaded videos on YouTube. Something more akin to television commercials. 

Google has been pushing into that market. It operates YouTube TV, where it's tasked with filling a couple of minutes of advertising for every hour of programming. It's also worked with Disney since late 2018, serving ads across video, desktop, and mobile.

The real value Google brings to the table is that it has a global user base, just like Netflix. In fact, YouTube is the only streaming service more widely used than Netflix. If the streaming service company wants a simple one-stop shop, Google is it.

2. Comcast

Comcast's (NASDAQ: CMCSA) media subsidiary NBCUniversal is a massive ad seller and a leader in ad technology for television. Its Freewheel ad technology could be the backbone for streaming ads on Netflix, as it already is on its own Peacock platform and several other streaming services. 

Moreover, NBCUniversal already has an ad sales team set up in the U.S. and Europe that could source premium ads for all the inventory coming to Netflix. As such, Netflix might be able to generate the highest revenue per ad impression in those regions by partnering with NBCUniversal.

Despite NBCUniversal's competitive position against Netflix, its ad-tech platform is widely used throughout the media industry. Disney used Freewheel before it switched to Google, for example. So despite the conflict of interest, it's capable of supporting other media companies.

For Netflix to work with NBCUniversal, it may need to find an additional partner or hire some staff in-house for ad sales and integration outside of Europe and the U.S. It's not clear if that's something it's looking to do, but outsourcing could be difficult as The Wall Street Journal reports NBCUniversal is looking for an exclusive contract.

3. Roku

Rumors began swirling that Netflix was interested in buying Roku (NASDAQ: ROKU) earlier this month. That might not be the best investment Netflix could make, and partnering with the connected-TV platform could be a much more reasonable choice. 

Roku could benefit from an ad-supported tier by using it as an opportunity to renegotiate its distribution agreement with Netflix. Roku may look to take a share of the advertising on Netflix, participating in the upside potential of the product instead of taking a flat commission on customers who sign up for the service through its platform. It could also push Netflix to buy ads on its home screen, something it's managed to get Netflix's competitors to do in its negotiations. Disney, for example, often does home-screen takeovers for new Disney+ releases on Roku's platform.

4. The Trade Desk

The Trade Desk (NASDAQ: TTD) offers a demand-side platform that connects media ad buyers with premium connected-TV ad inventory. Netflix could offer excess inventory that it or its partners haven't sold directly through The Trade Desk, enabling it to maintain high-quality ads while keeping a lean advertising sales team. 

The Trade Desk generates revenue by charging ad buyers a percentage of gross spend on its platform. If it has more premium ad inventory to fill via a partnership with Netflix, it ought to be able to increase revenue. Estimates put the amount of annual advertising spend on Netflix in the U.S. and Canada alone at around $2.5 billion. Granted, that likely wouldn't all go through The Trade Desk, depending on Netflix's other ad-tech partners, but a significant chunk could end up coming from its buyers.

Netflix could be a pivotal partner

As Netflix moves toward launching its ad-supported tier, investors will want to pay close attention to which company it partners with, as they could provide a significant boost to revenue over time. While it might take some time for advertising to become a significant part of Netflix's business, the impact could be seen much more quickly for any of the above companies. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 4 potential winners from Netflix's advertising plans appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Adam Levy has positions in Alphabet (C shares), Netflix, Roku, and Walt Disney. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Netflix, Roku, The Trade Desk, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Comcast and has recommended the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Netflix, The Trade Desk, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.