Warren Buffett and Berkshire Hathaway tend to avoid the cutting edge of technology when making stock purchases. Buffett and Berkshire's investing preferences tend to lean more toward proven businesses with solid cash flows. However, Berkshire does own shares in at least one artificial intelligence (AI)-related company, and given its recent stock sell-off, it looks like a solid opportunity right now.
Berkshire Hathaway owns roughly 10 million shares of Amazon (AMZN +0.53%), which makes it a small 0.7% of Berkshire's investment portfolio. Berkshire first bought the stock in 2019 and its willingness to hold on to most of its Amazon position (it sold 550,000 shares in the summer of 2024) through the ups and downs of the market since then has been noteworthy. This exposure to AI may be all Berkshire needs.
AWS is seeing strong growth thanks to AI spending
Amazon's e-commerce operations are likely the first thing most investors think of when it comes to this company, but e-commerce is not really the top reason to own the stock. Amazon's e-commerce segment remains the company's largest by revenue, but it only grew at a 7% pace in Q4 2024. Given that commerce businesses tend to have slim margins, this segment isn't generating the level of profits some investors might want.
However, there's one division within Amazon that is a profit-generating machine: Amazon Web Services (AWS). It also happens to be benefitting from AI more than any other segment of the company.
AWS is Amazon's cloud computing division, and this industry is seeing a boom in usage thanks to AI workloads from numerous clients coming online. AWS clients benefit in multiple ways by training their AI workloads through Amazon's servers. First, they don't have the massive upfront cost of purchasing expensive GPUs to train AI models or run the workloads. Second, by renting this computing power, clients can easily scale their usage as needed. Third, AWS users don't need to maintain the servers, which can be expensive. It also eliminates a single failure point if all of a company's servers are located in one spot, as AWS has multiple data centers to spread the workloads around.
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Key Data Points
Running workloads in the cloud offers many benefits, which is why cloud computing has grown so much over the past few years and will continue to expand. Grand View Research projects that the cloud computing market will grow at over a 20% compound annual growth rate from 2024 to 2030, with a market size increase from $752 billion to $2.39 trillion. That's a huge expansion, and with AWS being the market leader in this sector, it's likely to capture a good portion of that growth.
Although AWS doesn't generate as much top-line revenue as its commerce business, it generates the majority of Amazon's overall bottom-line profits. In 2024, AWS accounted for 58% of Amazon's total operating profits despite only making up 17% of sales. That's because Amazon generates a much higher operating margin renting out its computing power versus selling goods. This gap could get even larger over the next few years, as AWS' 2024 growth rate of 19% outpaced its North America and International e-commerce segments, which grew at 10% and 8%, respectively.
Amazon's stock isn't as expensive as it once was
With AWS' revenue growing faster than those other two segments, its profit is likely to rise, transforming Amazon from a commerce company with a cloud computing division on the side to a cloud computing company with a commerce side hustle. This transformation should be encouraging for investors, as cloud computing is a far steadier business and less affected by a macroeconomic downturn.
This transformation is also a big reason why Amazon's stock trades at a premium to the market generally.
AMZN PE Ratio data by YCharts
Still, Amazon's valuation has steadily come down over the past few years (while remaining relatively high). The drop comes because, as more revenue comes from AWS, its profits rise at a quicker pace due to its superior operating margin profile. This profit growth is what makes Amazon's stock cheaper on a forward basis. 31 times forward earnings isn't a bad price to pay for a growing company that also happens to be one of the world's most dominant in the sectors it operates in.
Given Berkshire's stock-buying habits of late (which are better described as stock-selling habits), I hove some doubts that it will be buying any more Amazon shares anytime soon. But I don't doubt that investors should consider scooping up Amazon shares here. The company has a fantastic outlook with its booming AWS division.
