Amazon's increasing prominence as a stock in Warren Buffett's investment portfolio.
Unvarnished Take on Warren Buffett's Amazon Adventure
Warren Buffett and Charlie Munger, the investing legends behind Berkshire Hathaway, aren't usually enamored with tech stocks, yet they've got a smidgen of Amazon shares in their portfolio for over three years. A mere sliver of the e-commerce titan belongs to Buffett's empire.
In 2019, Buffett fessed up to a faux pas. He wished he'd bought Amazon stock earlier, despite being smitten with Jeff Bezos. However, better late than never. Buffalo Bill, as he's fondly called, then took a plunge into Amazon and now owns 0.11% of the retail colossus, worth over a billion dollars in today's market cap of about $987 billion.
Buffett's Amazon shares added another $200 million to his war chest just a week prior, but the company's Q4 outlook left investors reeling. For the fourth quarter, Amazon projected an operating profit between zero and $4 billion. Meanwhile, its cloud business, a shining star, showed a growth slowdown, with corporate giants seeking discounts and cutting back on external data storage.
Amazon: A Fortress in the Economic Tides
The recent Amazon stock dip obliterated $120 billion in market value. However, Wall Street keeps a sunny disposition towards the e-commerce giant. JPMorgan, for example, asserts that the pressure on Amazon's business is primarily associated with the economy rather than the company itself. Thus, it's more about the economic turbulence causing panic than Amazon itself. Analyst Douglas Anmuth now has a price target of $145 (down from $175), while Credit Suisse lowered its target from $159 to $142 after the results.
For Warren Buffett, Amazon is less of a tech company and more of a consumer fortress company. With 38% of all e-commerce sales, Amazon reigns supreme in online retail. Despite numerous new contenders, its market share has remained relatively constant.
In the third quarter, Amazon continued to invest in boosting the customer experience, preserving its wide moat. CFO Brian Olsavsky succinctly put it after Q3 results: "We're relentlessly focused on creating an outstanding customer experience, and we believe that customer obsession is the only proven strategy for creating long-term value for shareholders."
Yielding Dividends on Investments
Buffett prefers to snatch up companies entirely, which is unfeasible with Amazon's gargantuan size. He favors companies that produce high returns on assets and reallocate a chunk of their profits for long-term investments.
Amazon follows this blueprint to the letter. Its mammoth e-commerce business facilitates investments in other companies, often more lucrative than its core business. AWS serves as a model, contributing significantly to Amazon's operating income. The company has also swallowed several acquisitions, such as the forthcoming purchase of iRobot, with some integrated into the Amazon platform, like MGM Studios, whose movie library was incorporated into Prime.
With over 200 million Prime subscribers, Amazon generates around $2.8 billion annually from Prime subscriptions alone.
Amazon Stock Evaluation
Buffett invests in companies he feels have long-term high profit potential. He once said his ideal holding period is "forever." Amazon's fortress-like status and adaptability to expand into new territories gives assurance to investors about the company's future growth. Thus, buying Amazon stock at current levels (approximately $92.50 or €95) shouldn't do significant long-term harm. However, the chart is lackluster, and Amazon could shed a few more dollars. By the by, Berkshire Hathaway will unveil its Q3 earnings next Saturday, November 5, 2022. After a billion-dollar loss in Q2, losses are anticipated once more. Nonetheless, B shares of the holding company are a smart buy.
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Despite the recent difficulties and stock drop, analysts remain optimistic about Amazon's future prospects, citing several reasons. Here are some key points about current price targets and reasons for optimism:
Analyst Price Targets
- BofA Securities: Increased its price target to $230, maintaining a Buy rating, acknowledging Amazon's core business stability in 2025.
- Oppenheimer: Lowered the target to $220, still 16% above recent closing prices, with an Outperform rating. They underscore growth in AWS as a positive aspect.
- JMP: Upgraded the target to $250, while Evercore ISI and Stifel maintain targets of $260 and $245, respectively, with Buy or Outperform ratings.
- Consensus: The average price target is approximately $241, showing a 27% premium over recent prices.
Reasons for Optimism
- Stable Core Business: Analysts point out that Amazon's core business has shown steadiness amidst market chaos.
- AWS Growth: Growth in Amazon Web Services (AWS) is expected to persist, even if e-commerce margins contract. Analysts applaud mid- to high-teen growth rates in the cloud computing segment.
- Long-Term Growth Strategies: Amazon's concentration on long-term growth and its diverse product range are viewed as strengths in a trying atmosphere.
- Market Positioning: Despite potential profit margin pressures from tariffs, Amazon is expected to protect its market place by keeping prices competitive.
- Despite Buffett's regrets about not investing in Amazon earlier, Berkshire Hathaway, led by Buffett and Munger, owns a significant portion of Amazon, valued at over a billion dollars, demonstrating their belief in the company's long-term potential.
- In the face of economic turbulence, Wall Street maintains a positive attitude towards Amazon, with analysts like Douglas Anmuth from JPMorgan setting a price target of $145 for the tech giant, even though this is a decrease from his previous target of $175.
- Amazon's diversified investments in areas such as AWS, acquisitions like iRobot and MGM Studios, and its Prime subscriptions generate substantial profits, positioning the company as a fortress in the economic tides.
- Buffett, known for his preference for companies that offer high returns on assets and long-term investments, sees Amazon as a consumer fortress company rather than a tech company, thanks to its dominance in online retail, a 38% market share, and its focus on providing an outstanding customer experience.
