When investors think of tech stocks in Warren Buffett’s portfolio, they generally think of his massive holdings in Apple (NASDAQ:AAPL). Unbeknownst to many, though, another of the Magnificent Seven tech stocks also makes an appearance in the Berkshire Hathaway portfolio.
Amazon (NASDAQ:AMZN) makes up less than 1 percent of Berkshire’s holdings, but the investment conglomerate owns about 10 million shares valued at around $2.1 billion that Buffett bought in the first half of 2019.
Why did Warren Buffett buy Amazon stock, and could AMZN still be worth a look today?
Amazon’s Moat
Arguably the best explanation for Berkshire buying Amazon is the business’ extremely wide moat. Buffett has always been a fan of buying businesses with strong brands or other structural advantages that make them difficult to compete with.
As by far the go-to platform for eCommerce sales, Amazon appears to have a virtually impenetrable moat. Amazon sells around 12 million products each and every day, and around one-third of Americans even have an Amazon Prime membership.
This moat has only been widened by Amazon’s massive logistics network, something that any potential competitor with the possible exception of Walmart would almost certainly be unable to replicate.
Amazon maintains about 1,200 logistics facilities worldwide, including around 600 in the US alone. The eCommerce giant also employs a huge fleet of drivers and even independent contractors to transport its massive volume of daily orders.
Turning away from the eCommerce side of its business for a moment, it’s also important to recognize the competitive edge that Amazon has built up in the cloud computing market.
Amazon Web Services is the largest cloud computing business in the world with a market share of about 30 percent. With demand for cloud services and now AI infrastructure growing rapidly, Amazon seems to have plenty of potential for future growth as the largest player in that market. Together, these factors form a very wide and hard-to-penetrate competitive moat.
Consumers are in the habit of buying from Amazon regularly, often treating it as a first stop when shopping for something online. This kind of entrenched consumer behavior is known to be one of the things Buffett looks for in a top-quality business.
Adding the AWS moat in cloud computing into the mix, Amazon may have appealed to Buffett by having a dominant position in not just one but two high-growth industries.
Buffett Got a Decent Price on Amazon
Unsurprisingly, another factor in Buffett’s decision to buy Amazon in early 2019 was likely the fact that the stock didn’t appear too expensive at the time.
Buffett’s average buy cost for AMZN is just $84.20, compared to a price of over $200 today. While no one was expecting the enormous growth in eCommerce that took place during the 2020-21 period when Buffett was buying his shares, he may have gotten a good buy that helped bolster his returns.
In early 2019, AMZN was generally trading at 70-80 times trailing earnings. While this seems quite high for a Buffett stock, it’s worth noting that this was around the time that the business was beginning to see strong earnings growth.
As recently as 2017, Amazon was reporting full-year EPS of only about $0.31 while trading at well over 100 times earnings. By the time Buffett bought it, the business had proven that it could generate consistent profits and the price weighted against earnings had come down.
So, while the turbulence in the early part of the decade certainly gave Amazon a boost shortly after Buffett added Amazon to the Berkshire portfolio, it appears that Berkshire bought at a time when the stock looked to be a good value anyway.
Buffett Had Looked at Amazon Before
Finally, the decision to add a small position in Amazon to the Berkshire Hathaway portfolio may have corrected what Buffett himself has acknowledged as a longstanding mistake in not buying the stock earlier.
Buffett decided not to invest in Amazon for many years, even after meeting Jeff Bezos in the early days of the business.
As such, Buffett may have thought that 2019 was a good time to finally pull the trigger on something he’d first looked at more than 20 years earlier.
Why Did Warren Buffett Buy Amazon Stock?
Buffett likely saw Amazon as a business with a very strong moat and considerable potential for future growth.
Even before the disruptions in 2020-21, it had become apparent that more and more shopping would gradually move to the online space as the years went on. This, combined with the fact Amazon had become solidly profitable, may have helped convince Buffett to finally put a small portion of his portfolio into AMZN.
In terms of valuation, Buffett probably didn’t score one of his classic undervalued buys when it came to Amazon. Even with earnings improving, Amazon’s P/E in 2019 still had a fairly large growth premium baked into it.
What AMZN was at the time, though, was a very strong business that was trading at a fair price. As Buffett and especially his late partner Charlie Munger always observed, it’s often possible to get excellent returns by buying high-quality businesses when they’re priced fairly.
It’s worth noting, however, that Berkshire hasn’t added any new shares since 2019. While this doesn’t mean that Amazon hasn’t been a good investment over the last few years, it seems that whatever value buying opportunity Buffett saw may have eroded as the stock’s price shot up.
With tech stocks having soared on the promise of AI in the last couple of years, it’s quite possible that Buffett hasn’t seen an entry point that appeals to him for buying more Amazon.
With that said, investors today may find Amazon’s competitive moat and growth outlook just as appealing as Berkshire Hathaway did five years ago.
Even with a higher price attached to it, AMZN may well still be a good buy for those hoping to generate long-term returns from the still-growing trends of eCommerce and cloud computing.
Though today’s investors may not see the kind of extremely rapid returns Buffett did by buying just before a massive event-driven surge in eCommerce, there’s still a decent argument to be made for owning Amazon at current prices.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
