Amazon's growing connection to Berkshire Hathaway's investment portfolio.
The Oracle of Omaha Loves the E-Commerce Giant: Amazon, Now a staple in Berkshire Hathaway's Portfolio
Warren Buffett, the legendary investor known for his aversion to tech stocks, recently had a change of heart. After a long hesitation, he's been investing in Amazon for over three years. Although Berkshire Hathaway's holding is significantly smaller than a mere thousandth of the e-commerce behemoth, it's still a substantial stake worth over a billion dollars, considering Amazon's hefty market capitalization of around $987 billion.
In 2019, Buffett admitted his regret for not investing earlier in Amazon, despite his admiration for Jeff Bezos. However, better late than never, right? Buffett eventually took the plunge and now holds 0.11% of the shipping titan.
The latest financial results from Amazon left investors concerned. For the fourth quarter, Amazon projects an operating profit between zero and $4 billion, and its cloud business showed signs of slowing down with enterprise customers seeking discounts and spending less on external data storage. This market turbulence caused Amazon's stock to drop, erasing $120 billion in market value.
Despite the recent dip, Wall Street remains optimistic about Amazon. JPMorgan believes the concerns are mostly macroeconomic, while the company itself is in good shape. Analysts now see a $145 price target for Amazon, down from its previous $175. Credit Suisse has also lowered its Amazon price target to $142 from $159.
The Moat: A Barrier to Competition
For Buffett, Amazon is less of a technology company and more of a consumer 'moat' company. With 38% of all e-commerce sales in the United States under its belt, Amazon dominates the online retail market, maintaining a steady market share despite fierce competition.
Amazon's commitment to enhancing the customer experience helps widen its moat. As CFO Brian Olsavsky put it after Q3 results, "We continue to focus on creating a fantastic customer experience, and we believe that customer obsession is the only reliable way to create long-term value for shareholders."
Returns on Investment: More than Just a Pretty Penny
Buffett typically goes for companies that generate high returns on assets and reinvest a good chunk of their profits at high rates over the long term. Amazon follows this playbook precisely. It leverages its massive e-commerce business to invest in other companies, often more profitable than its core business. AWS is a shining example, significantly contributing to Amazon's operating income. The company has also made strategic acquisitions, like the upcoming purchase of iRobot, and integrated certain acquisitions, such as MGM Studios, into its Prime platform. With over 200 million Prime customers, Amazon generates around $2.8 billion annually from this service alone.
The Buffet Measure: Forever
Buffett is known for his long-term investment strategy, aiming to hold stocks "forever." Amazon's moat and potential for growth in new areas should give investors confidence in the company's lasting value. Buying Amazon stock at its current price around $92.50 or €95 could be a smart move for those who believe in the company's long-term prospects. However, the stock may take a few more hits before it bounces back. On a side note, Berkshire Hathaway will report its third-quarter earnings next Saturday, November 5, 2022. Despite a billion-dollar loss in Q2, the B shares of the holding company remain a solid bet.
Buffett's interest in Amazon shows his increasing appreciation for companies with strong competitive advantages, a.k.a "moats." Amazon's brand, technology, network effects, and diversified ecosystem contribute to its high returns on investment, making it a worthy addition to Berkshire Hathaway's portfolio. Now, who said tech stocks were risky?
- Warren Buffett, known for his aversion to tech stocks, initially regretted not investing earlier in Amazon, despite his admiration for the company and its founder, Jeff Bezos.
- The latest financial results from Amazon caused concern amongst investors, with the company projecting an operating profit between zero and $4 billion for the fourth quarter, and its cloud business showing signs of slowing down.
- Despite the recent market turbulence, analysts still see a high price target for Amazon, with JPMorgan setting the target at $145 and Credit Suisse lowering their target to $142 from $159.
- For Buffett, Amazon is less of a technology company and more of a consumer 'moat' company, with 38% of all e-commerce sales in the United States under its control, and its commitment to enhancing the customer experience helping to maintain its market share.
