When investors hear that Warren Buffett's Berkshire Hathaway (BRK.A +1.77%) (BRK.B +1.49%) has opened a position in a stock, adds more of the stock to the company's holdings, or sells a stock, invariably the questions start arising about why the Oracle of Omaha made the investing move. They ask because Buffett has a decades-long track record of picking winners, and the list of Buffett stocks is filled with blue-chip stocks from diverse sectors of the market.
As of the latest update on March 31, Berkshire Hathaway's reported portfolio included more than 533,000 shares of Amazon (AMZN +0.06%) stock valued at roughly $1.78 billion. Amazon is a relatively recent 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 list has investors asking why the company finally made the move to buy and what attracted Buffett to the stock, even after Amazon had already grown so significantly? Let's see if we can answer what it is Buffett loves about Amazon.
NASDAQ: AMZN
Key Data Points
Buffett appreciates rising sales and surging profits
One factor that has undoubtedly attracted Buffett's attention is Amazon's impressive (and sustained) revenue growth. Over the last decade, Amazon has compounded revenue at an annual rate of 25.6%. That has translated into overall revenue increasing from $61 billion in 2012 to more than $470 billion in 2021. Among all companies, Amazon is only behind Walmart in terms of gross revenue. That massive revenue stream gives Amazon advantages of scale, including negotiating power with its suppliers.
And Buffett loves competitive advantages because it increases the sustainability of a company's revenue and profits. For instance, one of Amazon's advantages is its vast logistics network that 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 over 200 million Prime members (another competitive advantage) who get access to fast and free shipping.
When facing a choice of getting their product in two days or four days, consumers will almost always choose the former. In that way, Amazon attracts sellers to its platform. The virtuous cycle continues as wider product selection attracts more customers. Undoubtedly, Buffett recognizes the stickiness of this cycle and it is one of the reasons he loves Amazon stock.
AMZN Operating Margin (Annual) data by YCharts.
Amazon's economies of scale have expanded its operating profit margin from 1.1% in 2012 to 5.3% in 2021. Ultimately, the name of the game is to generate profits, and Amazon has boosted operating income from $676 million to $24.9 billion in that time. That remarkable growth rate at scale is likely to attract any investor's attention, let alone one who is keen to notice profits like Buffett.
Amazon's main business segments include retail sales and internet services. The latter segment is significantly more profitable than retail sales. Notably, Amazon Web Services (AWS) has been growing faster than the business overall. In its most recent reported quarter (ended on March 31), AWS accelerated to 37% revenue growth, up from 32% in the same year the year before. That increased the segment's overall revenue share to 16%, up from 13% year over year.
NYSE: BRK.B
Key Data Points
Undoubtedly, Warren Buffett appreciates that Amazon's sales increasingly have a higher profit margin. AWS reported an operating profit margin of 35.3% in its most recent quarter, considerably higher than the company's overall operating margin.
Amazon's selling at a bargain price
Amazon stock has been selling at a relatively inexpensive valuation recently. At a price-to-earnings ratio of 55.7, it's near the lowest Amazon has sold for in the previous five years. When Berkshire next reports its public holdings sometime in August, it will be interesting to see if the lower price entices Buffett to purchase more shares of Amazon's stock.
AMZN PE Ratio data by YCharts.
For all the reasons mentioned above, investors would be prudent to follow Warren Buffett and consider adding Amazon stock to their portfolios.
