Berkshire Hathaway, headed by legendary investor Warren Buffett, isn't known for being especially keen on tech stocks, at least not before it purchased its first shares in Apple in early 2016. That's why it might be a surprise to many that the conglomerate has a tiny stake in none other than Amazon (AMZN 1.34%), which is worth $1.4 billion as of this writing.
I think the smart move would be for individual investors to follow in Buffett's footsteps and buy shares of the e-commerce and cloud computing FAANG stock. Here are three reasons why.
Strong growth prospects
Amazon is unique in that despite its massive size -- it posted trailing-12-month sales of $538 billion -- it still has ample growth opportunities.
Investors know that the e-commerce operations are the company's bread and butter. After all, Amazon helped spearhead the growth of online shopping. And today, nearly $4 out of every $10 spent online in the U.S. happens on Amazon's website. That's certainly a clear indicator of the company's dominance. But due to the fact that 85% of shopping still happens in person in this country, there's a lot of growth runway.
Amazon also has the leading cloud services platform, called Amazon Web Services (AWS). Its Q2 2023 revenue of $22.1 billion was up just 12% year over year, continuing a notable slowdown from previous years. But AWS has a 32% market share on a global level, which is well ahead of the next-largest rival. And according to Grand View Research, the industry is estimated to be worth $1.6 trillion by 2030. If Amazon simply maintains its position, revenue is set to soar.
Thanks to AWS having an operating margin that averaged 24.7% in the past four quarters, as this segment becomes a more important part of the overall business, Amazon's profitability will increase.
With Prime Video, which commanded 3.4% of TV viewing time in the U.S. in the month of August, the company has a serious contender to continue benefiting from the rise of streaming entertainment. Amazon purchased MGM Studios early last year, giving it a boost in content production.
Another secular trend helping Amazon is digital advertising. Many investors probably don't know that the company generated almost $11 billion in ad revenue last quarter, up 22% year over year.
All of these growth pillars give me confidence in the trajectory of Amazon's operations looking ahead.
Wide economic moat
Amazon's competitive positioning is bolstered by the presence of a wide economic moat. This company has favorable traits that should keep it dominating the tech sector for a long time.
Amazon has one of the most valuable and widely recognized brands on the planet, thanks largely to its customer base of millions of consumers and businesses. And by operating various internet properties, the amount of data the business collects has created another advantage in the form of an intangible asset that is almost impossible to replicate.
Amazon's massive e-commerce marketplace has a strong network effect. As more buyers and sellers join, it immediately increases the value proposition to existing and new users. This creates a virtuous cycle that becomes unstoppable.
And by having a cost advantage, Amazon is able to serve up products and services at better costs than peers. For example, a huge logistics footprint consisting of warehouses, trucks, and drivers helps push down shipping costs due to how much volume Amazon has. For companies that sell far fewer products, it might not be as financially sound to focus on fast and free delivery. Amazon's sheer volume gives it the upper hand.
Attractive valuation
This business has been one of the best-performing stocks in the past, rising 768% in the last decade and 58% this year alone (as of Oct. 16). Despite these huge gains, shares appear reasonably priced right now, trading at a price-to-sales multiple of 2.5. Compared to the trailing-five-year average of 3.4, the current valuation looks like a bargain.
It's rare that investors are presented with the opportunity to buy such a dominant business with strong growth prospects. Plus, it has a wide economic moat and sports an attractive valuation. Perhaps it's best to copy Berkshire and add Amazon to your portfolio now.
