Warren Buffett is one of the most successful investors of all time, with a performance that easily surpasses the S&P 500‘s average. His holding company, Berkshire Hathaway, presents a valuable snapshot of the companies he believes in.
Below, I’ll explore why e-commerce giant Amazon (AMZN 3.62%) could make an excellent long-term pick in this uncertain macroeconomic environment.
Buffett was somewhat late to the party
While Warren Buffett is a hugely successful investor, he isn’t infallible. Berkshire Hathaway passed on the opportunity to bet on Amazon when it was just a start-up in 1994, and again when the stock went public in 1997 at just $18 per share ($0.075, adjusted for stock splits). Buffett finally pulled the trigger in 2019 and now owns roughly $1.7 billion in shares.
In the past, Buffett may have seen Amazon as a speculative business with an uncertain future. However, the company now aligns more closely with his conservative investment strategy thanks to its deep economic moats, which are the competitive advantages it has over rivals in several different industries.
Amazon’s biggest advantage may be its sheer scale. The larger a company becomes, the easier it is for management to take advantage of efficiencies to reduce costs and pass on savings to customers. It also creates a network effect, as more customers attract more merchants and a wider variety of items. This, in turn, attracts even more customers.
Amazon’s scale advantages aren’t limited to just e-commerce. The company is also a leader in cloud computing through Amazon Web Services (AWS), which holds a 30% global market share. In recent years, it has leveraged this to become a leader in generative artificial intelligence (AI) by allowing clients to access computing power for running and training large language models (LLMs) within AWS.
The numbers look good
While investors shouldn’t expect Amazon stock to repeat the 675% gain it achieved over the past decade, the company can maintain its market-beating performance over the long term due to its strong fundamentals and reasonable valuation. First-quarter revenue jumped 10% year over year to $187.7 billion, driven by particular strength in AWS, which is benefiting from rising demand for AI-related workloads.
It’s unclear how this business will play out over the long term. However, Amazon is investing heavily in the opportunity by buying more of Nvidia’s AI chips. It also builds custom chips called Trainium and Inferentia, which are designed to reduce the company’s dependence on third parties and run specific workloads more efficiently than one-size-fits-all solutions.
Image source: Getty Images.
The best thing about Amazon’s AWS-led growth is its higher profitability, compared to e-commerce. Fourth-quarter operating income jumped 61% to $21.2 billion, with approximately half of the total coming from the AWS segment.
Amazon is working to boost profitability across its businesses by implementing cost-cutting measures. It aims to slash around 14,000 managerial positions this year, aiming to save between $2.1 billion and $3.6 billion annually.
What are the potential challenges?
Amazon’s biggest near-term challenge may come from macroeconomic uncertainty. The Trump administration’s on-again, off-again tariffs could cause consumer prices to rise temporarily, potentially hurting demand. Furthermore, the unpredictable policy will make it hard for companies to plan their supply chains and make investments for the future.
That being said, Amazon’s growing reliance on AWS, its cloud computing segment, shields it from much of this tariff-related uncertainty. Furthermore, with a forward price-to-earnings multiple (P/E) of 26, the company’s valuation appears to account for much of these fears.
While shares are pricier than the Nasdaq-100 estimate of median of about $24, Amazon deserves a premium due to its deep economic moat and impressive bottom-line momentum. It’s easy to see why Warren Buffett is a fan.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.