Famous investor Warren Buffett isn't known to be enthusiastic about technology. The "Oracle of Omaha" has traditionally invested in simple, consumer-facing companies with strong brands. Look at the dozens of stocks held by his holding company, Berkshire Hathaway, and you won't find many tech names.
Ironically, Apple is Berkshire's largest holding and one of Buffett's most successful investments. Yet, the stock has some concerns today that could explain why Buffett has steadily sold shares over the past year.
Buffett owns another top technology stock, a smaller investment (under 1%) that hasn't gotten as much buzz yet has resided in Berkshire's portfolio since 2019. That would be e-commerce and cloud computing behemoth Amazon (AMZN -1.33%).
Here is why investors should consider buying and holding the stock for the long haul.
Amazon's legacy business epitomizes Buffett's style
If you live in the United States, the odds are high you've ordered something from Amazon. The company built its name in e-commerce and dominates America's online retail landscape today with an estimated market share of 40%. That's far more than even Walmart, which ranks second at 10.6%.
Amazon's retail business has obvious Buffett traits. It's front and center with its customers, who shop online and see Amazon delivery vans almost daily in their neighborhoods. If you use Amazon frequently, you probably have a Prime subscription, which offers perks on shipping and access to Amazon's complimentary services, such as Prime Video. Prime has over 200 million subscriptions and creates a sticky recurring revenue stream.
The company enjoys a wide competitive moat, and its retail business features an unmatched supply chain. This enables Amazon to offer more products at lower prices and ship them to you faster. Amazon's retail business keeps growing, too. Consumer spending is the largest pillar of America's economy, and e-commerce has penetrated only about 16% of total retail spending.
Part of the reason Amazon's e-commerce business dominates is that it can afford to operate on razor-thin profit margins. Amazon's retail business is dominant, with room to grow over the long term.
Cloud computing leadership with AI growth potential
Amazon's cloud computing platform, AWS, is the global leader in this area and contributes most of the company's profits. Through nine months of 2024, AWS generated $29.2 billion (74%) of Amazon's operating profit despite only representing 17% of revenue.
Enterprises have primarily shifted from on-site computer servers to cloud platforms like AWS. Most new software applications are cloud-based today, which will likely hold for artificial intelligence (AI). Industry experts estimate the global cloud services market was worth $618 billion this year but grow to over $2.7 trillion by 2034.
If AWS enjoys similar growth, Amazon's most profitable business unit could grow four to five times its current size over the next decade. That alone justifies holding Amazon stock.
A wonderful company at a fair price today
Buffett has shared numerous quotes and nuggets of wisdom over his career. One of my favorites is, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." But even Buffett isn't perfect. He is a notorious stickler for bargains and may regret not buying more Amazon years ago. The stock has risen roughly 200% since early 2019, when Berkshire first invested.
Today, Amazon trades at a price-to-earnings ratio of 48. Meanwhile, analysts estimate the company will grow earnings by an average of 22% annually over the long term. I like using the PEG ratio to weigh a stock's valuation against its anticipated growth. Generally, I'll invest in top-notch companies with PEG ratios of up to 2.0 to 2.5. Amazon's PEG ratio of 2.2 is currently flirting with that ceiling.
So, is Amazon a bargain today? No, probably not. After all, the stock has surged nearly 50% over the past year. Still, it's arguably a fair price, and a long-term investor should see Amazon's business grow into that valuation (and then some) over the coming years.
