Amazon (AMZN +3.41%) looks as impressive as it has in years. The stock is up close to 75% year to date. The tech titan's profitability is increasing. It's moving into exciting new areas.
I wrote only a few weeks ago that Amazon ranked among three Warren Buffett stocks with strong moats to buy right now. However, the Oracle of Omaha apparently doesn't have the same point of view. Berkshire Hathaway's (BRK.A 0.55%) (BRK.B 0.53%) latest 13F filing revealed that the conglomerate trimmed its stake in Amazon by roughly 5%. Why is Buffett selling Amazon stock instead of buying it hand over fist?
NASDAQ: AMZN
Key Data Points
It probably isn't Buffett selling Amazon
First, it's important to acknowledge that Buffett probably didn't make the decision to sell some of Berkshire's shares of Amazon. He didn't make the original call to buy the stock, either.
Buffett mentioned in his 2022 letter to Berkshire Hathaway shareholders that Todd Combs and Ted Weschler had "total authority in respect to $34 billion of investments" (emphasis original). He added that a significant portion of the investments managed by Combs and Weschler were in the pension plans of businesses owned by Berkshire. However, Buffett said that several of the conglomerate's major equity holdings were overseen by the two investment managers.
We know that Amazon is in that group. Buffett revealed in an interview with CNBC in 2019 that Berkshire had at long last added Amazon to its portfolio. He noted that the buy was initiated by one of Berkshire's investment managers but didn't specify which one.
Of course, it's possible that Buffett became personally involved with the Amazon stake later. That's what happened with Berkshire's position in Apple. Either way, though, Buffett is so synonymous with Berkshire Hathaway that when the conglomerate buys or sells a stock, it's widely referred to as Buffett buying or selling the stock, regardless of who actually made the decision.
Portfolio rebalancing
Perhaps the best explanation as to why Berkshire sold Amazon stock is that it was part of an overall portfolio rebalancing. Investment managers often prefer to ensure that individual positions don't make up too high of a percentage of their overall portfolio.
This likely portfolio rebalancing also featured some housecleaning. For example, Berkshire completely exited its positions in several longtime holdings, including Johnson & Johnson and Procter & Gamble.
I don't think, though, that any of the Berkshire Hathaway team have soured on Amazon. If they had, I suspect that we would have seen much greater profit-taking in the third quarter. As previously mentioned, Berkshire only reduced its stake in Amazon by around 5%. It still owns 10 million shares of the e-commerce and cloud services giant.
The real reason why Buffett isn't buying Amazon
We still haven't addressed why Buffett isn't buying Amazon stock hand over fist, though. I think there are two potential answers:
- Buffett doesn't feel confident projecting Amazon's future earnings.
- He has a comfort level with his earnings projections for Amazon but doesn't like the stock's valuation with respect to them.
My view is that the first answer is the best one. Buffett has stated before that he and his longtime business partner Charlie Munger will take a hard pass on a stock if they don't feel comfortable estimating its future earnings. I could definitely understand why he wouldn't have a warm and fuzzy feeling projecting Amazon's earnings. For example, it's quite challenging to accurately predict how generative AI will impact Amazon given the intense competition from rivals such as Alphabet's Google and Microsoft (along with its partner, OpenAI).
I suspect that Buffett's lack of confidence in forecasting Amazon's earnings will keep him on the sidelines. Combs or Weschler, though, could be more likely to go with their instinct. I think that if they do, we could see Berkshire buying more shares of Amazon on a pullback.
