Amazon as a Long-Term Investment Amid Market Uncertainty
Warren Buffett is one of the most successful investors of all time, with a performance that easily surpasses the S&P 500‘s average. His holding company, Berkshire Hathaway, presents a valuable snapshot of the companies he believes in.
In this article, I’ll discuss why e-commerce giant Amazon (NASDAQ: AMZN) could make an excellent long-term pick in this uncertain macroeconomic environment.
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Buffett’s Delayed Investment in Amazon
While Warren Buffett is known for his impressive investment strategies, he is not infallible. Berkshire Hathaway missed the chance to invest in Amazon when it was a fledgling startup in 1994, and again when the company went public in 1997 at just $18 per share ($0.075, adjusted for splits). Buffett finally invested in Amazon in 2019, acquiring approximately $1.7 billion in shares.
Initially, Buffett may have viewed Amazon as a speculative venture. Today, however, it aligns better with his conservative investment approach, thanks to its strong economic moats, or competitive advantages over rivals in various sectors.
One of Amazon’s biggest strengths is its scale. As the company grows larger, it becomes more efficient, reducing costs that can be passed onto customers. This also establishes a network effect where more customers attract more sellers, creating even greater customer appeal.
Amazon’s advantages extend beyond e-commerce. The company leads in cloud computing through Amazon Web Services (AWS), which commands a 30% global market share. Recently, it has cemented its position in the generative artificial intelligence (AI) space by providing clients with essential computing power for training large language models (LLMs).
Strong Financial Fundamentals
Investors should temper expectations regarding Amazon’s stock replicating the 675% gain seen in the past decade. Nonetheless, its robust fundamentals and fair valuation could sustain market-beating performance going forward. In the first quarter, revenue increased by 10% year over year, reaching $187.7 billion, fueled by strong growth in AWS amid rising demand for AI workloads.
The long-term trajectory of AWS remains uncertain, yet Amazon is heavily investing in the future. It is acquiring more of Nvidia’s AI chips and developing custom chips like Trainium and Inferentia to improve efficiency and reduce reliance on external suppliers.
Image source: Getty Images.
One advantage of AWS-driven growth is the higher profitability compared to e-commerce alone. In the fourth quarter, operating income surged by 61% to $21.2 billion, with about half coming from AWS.
To enhance profitability, Amazon is implementing cost-saving measures, planning to cut around 14,000 managerial positions this year, which could lead to annual savings between $2.1 billion and $3.6 billion.
Potential Challenges Ahead
Amazon faces near-term challenges primarily from macroeconomic uncertainty. Tariffs from the Trump administration may lead to temporary increases in consumer pricing, impacting demand. Such unpredictable policies complicate supply chain planning and investment strategies.
Despite these challenges, Amazon’s growing dependence on AWS provides a buffer against tariff-related risks. Additionally, Amazon’s forward price-to-earnings (P/E) ratio stands at 26, suggesting that its valuation already reflects these concerns.
Although Amazon shares might be pricier compared to the median levels in the Nasdaq-100, estimated at around $24, its deep economic moat and strong growth momentum justify this premium. Thus, it’s not difficult to see why Warren Buffett appreciates the stock.
Should You Invest $1,000 in Amazon Now?
Before making a purchase of Stock in Amazon, consider this:
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
