Warren Buffett's holdings company Berkshire Hathaway currently owns about 10.7 million shares in Amazon (AMZN 3.89%), a 0.1% stake. The company makes an attractive investment with its positions in e-commerce, the cloud market, consumer robotics, grocery, and even space satellites strengthening its business through diversification.
However, macroeconomic headwinds in 2022 led to steep declines in Amazon's e-commerce segments and brought its stock down to a bargain price compared to its projected growth. Here's why this ridiculously cheap Warren Buffett stock could help make you richer.
E-commerce won't be down forever
In fiscal 2022, Amazon's North American and international segments reported $10.6 billion in operating losses, primarily driven by foreign exchange fluctuations and reductions in consumer spending. The company remained profitable thanks to its booming cloud business, which saw Amazon Web Services hit $22.8 billion in operating income. However, the declines in retail earnings still triggered a sell-off where Amazon's stock plunged 50% throughout 2022.
This year has a slightly rosier look for the tech giant. Improving inflation and projected market growth suggest recent hurdles are only temporary for e-commerce earnings. Inflation eased for the ninth consecutive month in March, rising 5%. Comparatively, prices increased 6% in February and hit a high of 9.1% in June 2022. Reductions in the cost of living are positive for Amazon, as consumers will be more prone to spend in its online retail shop.
NASDAQ: AMZN
Key Data Points
Moreover, despite recent challenges, the e-commerce market as a whole is on its way up. In 2019, online retail sales were $3.4 billion worldwide, rising 71% to $5.7 billion by 2022. That figure is expected to grow again by 2026, increasing another 43% to $8.1 billion. Meanwhile, Amazon holds an undisputed dominance in the market, with its e-commerce services operating in about 20 different countries.
In the U.S. alone, Amazon holds a leading 37.8% market share in online sales, with the second largest share going to Walmart at 6.3%.
The potency of Amazon's e-commerce makes it the king of a lucrative market. Its dominance, unfortunately, meant substantial losses amid an economically challenging 2022. However, the company will likely profit massively over the long term as the industry recovers and continues on its growth path.
A bargain alongside its 12-month price target
Amazon's e-commerce losses have been detrimental to its stock and the metrics that usually indicate a good buy, with its price-to-earnings ratio (P/E) at a costly 77. For reference, the average P/E is around 20 to 25, with anything below considered a good-valued stock. The high P/E stems from Amazon's tricky financials, which have seen its free cash flow decline significantly over the last three years, at a negative $17 billion as of Dec. 30, 2022.
However, investing in stocks is not a short-term game, and over the long term, Amazon is poised to offer investors substantial gains. Wall Street seems to agree, as 46 out of 50 analysts have rated the company's stock a buy or strong buy. Meanwhile, its average 12-month price target of $137.37 accounts for a 34% rise in its stock.
Amazon has become a household name worldwide, offering a convenient and cost-effective way to shop online. Alongside e-commerce, the company holds the biggest market share in cloud computing, an industry projected to expand at a compound annual growth rate of 14.1% through 2030 and is likely to benefit from developments in artificial intelligence. As a result, Amazon stands to profit considerably over the coming years as its most crucial markets continue to expand.
With its shares down more than 30% year over year and an attractive 12-month price target, Amazon is a ridiculously cheap Warren Buffett stock that could make you richer with a little patience.
