When Berkshire Hathaway (BRK.A 0.14%) (BRK.B 0.06%) CEO Warren Buffett buys or sells a stock, everyone from professional traders to everyday investors pays close attention. That's because of the Oracle of Omaha's track record, which features an average annual return of 20.1% for his company's Class A shares (BRK.A) over the past 57 years (through Dec. 31, 2021).
Warren Buffett's success is a function of his love for cyclical businesses and dividend stocks, as well as his willingness to hold profitable, time-tested stocks over long periods. Knowing that the Oracle of Omaha has packed Berkshire Hathaway's investment portfolio with winners, the bear market decline in the major U.S. indexes has laid out some amazing bargains in plain sight -- and even Wall Street has taken notice.
Image source: The Motley Fool.
Based on the high-water price targets issued by select Wall Street analysts, the following three Warren Buffett stocks offer between 105% and 137% upside over the next year.
Amazon: Implied upside of 105%
The first Buffett stock that has the potential to more than double in value, according to one analyst, is e-commerce juggernaut Amazon (AMZN -0.40%). Adjusting for Amazon's 20-for-1 forward stock split in June, Ivan Feinseth of Tigress Financial believes the company is worth $232.75 per share. Based on its closing price of less than $114 per share this past weekend, Amazon offers up to 105% upside for patient investors.
Most people associate Amazon with its leading online marketplace. In March, eMarketer released a report estimating that Amazon would account for just shy of 40% of all U.S. retail sales this year. For comparison, the 14 competitors directly behind it in U.S. online retail market share are still more than eight percentage points back on a combined basis.
However, Amazon's online marketplace isn't as critical to the company's success as you might think. Even though it's the top revenue driver, the margins associated with online retail sales tend to be razor-thin. What's far more important for Amazon is that its higher-margin sales channels continue growing.
A perfect example is Prime. The popularity of Amazon's online marketplace, coupled with its growing content library and exclusive rights to Thursday Night Football, has easily pushed global Prime subscriptions above 200 million (as of April 2021). Ongoing investments in Prime should help Amazon build on its already impressive $35 billion annual sales run-rate from subscription services.
There's also cloud infrastructure provider Amazon Web Services (AWS), which would likely be the most valuable cloud company if it were independently traded. AWS accounted for an estimated 31% of global cloud spending during the second quarter, according to Canalys. This market share dominance is important given that cloud growth is still in the very early innings.
With the assistance of subscription services, advertising services, and AWS, Amazon has a real shot to triple its operating cash flow over the next four years.
StoneCo: Implied upside of 137%
The second Warren Buffett stock that can more than double over the next 12 months is fintech up-and-comer StoneCo (STNE 0.59%). Credit Suisse analyst Daniel Federle foresees StoneCo shares hitting $22, which would imply upside of 137% from where they closed out last week.
The big catalyst for StoneCo is that digital payment adoption is in its early stages -- especially with the micro-merchants and small businesses the company targets with its digital payment services and financial tools. What's more, it's operating in Brazil, which is an emerging market economy that has traditionally grown at a faster rate than the U.S. and many other developed markets.
Superficially, a lot of key performance metrics for StoneCo are heading in the right direction. Total payment volume (TPV) traversing the platform jumped 50% from the comparable quarter a year ago, while the number of active banking clients grew 55%. Perhaps most impressive, the company's take-rate (i.e., the percentage of revenue it gets to keep for facilitating transactions) continues to climb. As a fee-driven platform, a steadily growing number of users and higher TPV is generally a favorable formula.
But it's not all peaches and cream for StoneCo for a couple of reasons. For starters, Brazil is contending with very high inflation. Although year-over-year inflation for August actually fell to 8.7% in August 2022 from 10.1% in the sequential month (July), persistently high levels of inflation can hurt the lowest decile of earners. That could be a problem for the small businesses that StoneCo relies on for its growth.
Another potential issue with StoneCo is that its loan portfolio is backed by debt. This was a smart strategy when inflation was low, and access to capital was abundantly cheap. But with most central banks scrambling to raise rates and tame inflation, it could get increasingly costlier for StoneCo to service its debt and grow its financial services segment.
Despite Federle's upside price target, it might be wise to wait for StoneCo to get a tighter grip on its expenses before you consider diving in.
Image source: Getty Images.
Paramount Global: Implied upside of 133%
The third Warren Buffett stock with some serious upside, according to Wall Street, is media and entertainment company Paramount Global (PARA -0.54%). According to the analysts at Benchmark, the parent company of CBS has the potential to hit $47 per share over the next 12 months. This implies upside of up to 133% from where shares ended last week.
The unquestioned catalyst in Paramount's sails is the growth of its streaming division. Even with the company pulling the plug on its services to Russia and removing 3.9 million subscribers, it still netted a 1.3-million-subscriber gain in the second quarter. The company's direct-to-consumer (DTC) segment is now 64 million subscribers strong, with subscription revenue up 74% year-over-year in the June-ended quarter. As more consumers cut the cord with traditional cable companies, DTC services like Paramount+ will be there to reel them in.
The other intriguing catalyst for Paramount is the resurgence of its entertainment segment. Although movies have been hit-and-miss since the COVID-19 pandemic began, there's no question that Top Gun: Maverick put Paramount back on the map. This movie was almost singlehandedly responsible for helping more than double year-over-year sales in the latest quarter. If moviegoers remain enticed by what's in theaters and/or available via streaming, a reinvigorated film entertainment operating division could be a real boon for Paramount.
But there are also headwinds to contend with. The U.S. economy has delivered back-to-back quarters of gross domestic product retracements, which for many investors would signal a "technical recession." When economic downturns/recessions arise, advertising spending tends to take a hit. Though ad revenue remains strong with Paramount's DTC division, it's already falling in the higher-revenue TV media operating segment.
And don't forget, the media space is highly competitive. Most major media and entertainment companies offer some form of streaming service, which could lead to gains at Paramount+ being offset by weakness in the company's traditional TV media segment. This is potentially worrisome given Paramount's roughly $11.8 billion in net debt.
But unlike StoneCo, I see a clearer path to gains for investors. Since the U.S. and global economy spend far more time expanding than contracting, the core of Paramount Global's business should expand over time. Investors will simply have to be patient to take advantage of Paramount's positioning for an increasingly digital world.
