As of June 2022, Warren Buffett's Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) portfolio controls 10.67 million shares of Amazon (AMZN -1.65%) -- a position worth $1.29 billion. Buffett has long been a fan of the company, praising its management skill and dominance of the e-commerce and cloud computing industries.
Let's explore why it could also make a top investment for your portfolio.
An undeniably quality business
Warren Buffett's investment strategy focuses on quality businesses instead of struggling "cigar butts" that are past their prime. With unquestionable dominance of U.S. e-commerce and global cloud computing (boasting market shares of 38% and 34%, respectively), Amazon is as quality as they come. And despite near-term challenges, the company's long-term trajectory remains intact.
Image source: The Motley Fool.
Second-quarter results were a mixed bag. Net sales grew 7% to $121.2 billion. But challenges like inflation and the end of the COVID-19-related online shopping boom put pressure on the company's margins leading to a net loss of $2 billion, down from a net profit of $7.8 billion in the prior-year period. That said, both headwinds look likely to normalize over the long term (for example, the Federal Reserve is raising rates to tame inflation) and are related to macroeconomic challenges, not company-specific failures.
Amazon has plenty of options to drive continued growth. According to Insider, it plans to roll out its online marketplace in five new countries, mainly in Africa and Latin America, next year. Cloud computing is also an exciting opportunity. Management believes the economy is at the early stages of cloud adoption, leaving plenty of room for expansion as Amazon Web Services (AWS) leverages its economic moat in the industry.
A rock-solid economic moat
What exactly is an "economic moat"? Coined by Warren Buffett, the term refers to a company's ability to sustain a long-term competitive advantage over rivals. For Amazon's e-commerce operations, this largely comes down to its scale and network effects. Because more consumers buy on Amazon, more merchants sell on Amazon -- leading to more competition and product variety, which becomes a positive feedback loop. Scale also benefits Amazon's cloud business, AWS, in terms of brand recognition and high switching costs for clients who might consider its competitors.
Over the long term, Amazon is likely to use its natural advantage to expand into new synergistic industries like advertising. According to Insider, Amazon is now the third-biggest digital advertising company in the world -- behind Google and Facebook -- generating $31 billion in 2021. The company's massive user base of shopping-motivated customers gives it a natural advantage in this competitive industry.
Be greedy when others are fearful
With the S&P 500 down 21% year to date, we are now in a bear market. And the Fed's rate hikes and other tightening policies could make the downside worse before it gets better. That said, bear markets are a great time to bet on quality companies trading at a discount to their historic highs. And Amazon's resilient operations and rock-solid economic moat could make it a great way to bet on a rebound. It isn't hard to see why Buffett backs the company.
