Here’s why Warren Buffett loves Amazon

When investors hear that Warren Buffett Berkshire Hathaway (BRK.A -0.35%) (BRK.B -0.44%) opened a position in a stock, added more of the stock to the company’s holdings, or sold a stock, invariably questions begin to arise as to why the Oracle of Omaha decided to invest. They ask because Buffett has decades of experience picking winners, and Buffett’s stock list is filled with blue-chip stocks from various market sectors.

According to the latest update as of March 31, Berkshire Hathaway’s reported portfolio included more than 533,000 shares of Amazon (AMZN -2.26%) shares valued at approximately $1.78 billion. Amazon is a relatively new addition to the portfolio. It was first added in early 2019, and Buffett readily admitted that not buying it sooner was a mistake on his part and a missed opportunity.

Amazon’s presence on the Berkshire listing has investors wondering why the company finally decided to buy and what drew Buffett to the stock, even after Amazon had already seen such growth. important? Let’s see if we can answer what Buffett likes about Amazon.

Buffett appreciates higher sales and higher profits

One factor that has undoubtedly caught Buffett’s attention is Amazon’s impressive (and sustained) revenue growth. Over the past decade, Amazon has compounded its revenue at an annual rate of 25.6%. This has translated into an increase in overall revenue from $61 billion in 2012 to over $470 billion in 2021. Of all the companies, Amazon is only behind walmart in terms of gross income. This massive revenue stream gives Amazon advantages of scale, including bargaining power with its suppliers.

And Buffett loves competitive advantages because they increase the sustainability of a company’s revenue and profits. For example, one of the advantages of Amazon is its vast logistics network which allows it to offer fast shipping to hundreds of millions of people. It would be prohibitively expensive for a competitor to build such a network after Amazon has established itself. Third-party sellers can use Amazon’s fulfillment services to access Amazon’s more than 200 million Prime members (another competitive advantage) who have access to fast, free shipping.

Faced with the choice of getting their product in two days or four days, consumers will almost always choose the former. In this way, Amazon attracts sellers to its platform. The virtuous circle continues as a wider product selection attracts more customers. Without a doubt, Buffett recognizes the rigidity of this cycle and that’s one of the reasons he likes Amazon stocks.

AMZN operating margin data (annual) by YCharts.

Amazon’s economies of scale have increased its operating profit margin from 1.1% in 2012 to 5.3% in 2021. In the end, the name of the game is to generate profits, and Amazon has increased its operating profit from $676 million to $24.9 billion during this period. This remarkable large-scale growth rate is likely to catch the eye of any investor, let alone one who wants to notice profits like Buffett.

Amazon’s main business segments include retail and internet services. The latter segment is significantly more profitable than retail sales. Notably, Amazon Web Services (AWS) has grown faster than the company as a whole. In its most recent quarter (which ended March 31), AWS accelerated revenue growth to 37% from 32% in the same year a year earlier. This brought the segment’s overall revenue share to 16%, up from 13% year-over-year.

Undoubtedly, Warren Buffett appreciates that Amazon sales increasingly have a higher profit margin. AWS posted an operating profit margin of 35.3% in its most recent quarter, which is significantly higher than the company’s overall operating margin.

Amazon sells at a bargain price

Amazon shares recently sold at a relatively cheap valuation. With a price-to-earnings ratio of 55.7, it is close to the lowest Amazon has sold in the previous five years. When Berkshire releases its next public holdings in August, it will be interesting to see if lower prices prompt Buffett to buy more Amazon stock.

AMZN PE Ratio Chart

AMZN PE Ratio data by YCharts.

For all the reasons mentioned above, investors would be cautious to follow Warren Buffett and consider adding Amazon stocks to their portfolios.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Comments are closed.