Following what billionaire hedge fund managers make can be a great idea source for individual investors. While nobody should follow them blindly, understanding why they made purchases when they did can give investors a new perspective on the market.
Every quarter, any firm with more than $100 million in investments must disclose to the SEC what its holdings were at the end of the quarter. These reports are then released to the public 45 days after the quarter's end in a Form 13F. This gives investors a gold mine of information to digest, and I think there's one important move that investors should take note of.
Billionaire Bill Ackman and his Pershing Square Capital Management Fund took a massive, $1.28 billion stake in Amazon (AMZN 3.12%) during the quarter. Previously, they owned zero shares. But now, it makes up 9.3% of total assets. That's a huge call, but should investors follow his lead?
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Amazon is seeing massive growth from two dominant segments
Amazon may be known for its online store and the various businesses that support it. Still, two other AI-adjacent business segments likely excite Ackman and his company. Amazon Web Services (AWS) and advertising services are two of the fastest-growing segments of Amazon, and make up the primary reason to invest.
Unlike traditional retail, both of these segments produce strong margins, which boost Amazon's profits.
AWS is Amazon's cloud computing wing, and made up 53% of Amazon's total operating profits in Q2. It's also putting up strong growth, with revenue rising 17% year over year to $30.9 billion. The tailwinds in the cloud computing industry are massive and driven by both AI and traditional workloads. AWS will continue to be a force behind Amazon's earnings for some time, and it's likely a huge reason why Ackman invested in it.
Another key part of Amazon's business that has emerged recently is its advertising wing. Unfortunately for investors, Amazon doesn't break out advertising's profit margins, but by looking at other companies that get nearly all of their profits from advertising, it's safe to say this is a very profitable enterprise for Amazon. It's also Amazon's fastest-growing segment, with revenue rising 23% year over year in Q2 to $15.7 billion.
Both these divisions are stars of Amazon's earnings report, and make for the primary reasons to invest in Amazon's stock. But does the current moment make for a great time to buy Amazon?
Amazon's stock isn't as cheap as it once was
We've known about the Amazon purchase by Ackman for some time. Back in May, he disclosed in a conference call that they purchased Amazon shares. However, investors didn't know the size of that move until now.
If you recall, Amazon's stock bottomed out around $167 in late April, which is likely around the time that Pershing started buying. Amazon's stock now trades for about $230, so it has likely made a solid profit.
But Ackman and his team aren't short-term traders; they're long-term investors, so they see something in Amazon's business.
Although Amazon's stock wasn't as cheap as it was four months ago, it's still at a level it has historically traded at.
AMZN PE Ratio (Forward) data by YCharts
At 35 times forward earnings, Amazon's stock is far from cheap. But it's also not nearly as expensive as it has been in the past.
I think the long-term opportunity for Amazon is still attractive, and while I would have preferred to buy shares at a cheaper price, today's price tag isn't all that bad either. I think Amazon is still a solid purchase today, and long-term investors will benefit from the growth of AWS and advertising.
