Warren Buffett isn’t known for making bold bets on fast-growing tech stocks. The billionaire investor has a reputation for sticking with companies whose earnings and cash flow trends are predictable well into the future. That’s much easier to do with a company like Coca-Cola than it is for one like Nvidia.
Yet Buffett’s Berkshire Hathaway has held onto a big investment into another tech stock that, like Nvidia, is a member of the “Magnificent Seven.” Let’s look at some reasons why Berkshire Hathaway might be holding onto Amazon (NASDAQ: AMZN) as an excellent long-term growth investment.
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Follow the cash
The e-commerce titan’s late-April earnings report was packed with good news for investors, including positive revenue trends. Amazon added $16 billion to its sales footprint in the quarter, translating into a 13% increase year over year. Cash trends were just as impressive, though, and point to potentially massive earnings growth ahead.
Amazon has been cutting costs even as its sales are tilting more toward cloud services versus low-margin product sales. You can see evidence of the dramatic financial impact here in the fact that operating cash flow has nearly doubled to $99 billion over the past year.
Management focuses on long-term growth in this key financial metric, and it’s clear that gains here are helping push earnings higher as well. Amazon’s net income soared to $10 billion from just $3 billion in Q1. “It was a good start to the year across the business,” CEO Andy Jassy said, in a press release.
Growth avenues
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You’d be wrong to think that this business is too big to grow. The Amazon Web Services (AWS) segment is booming as companies speed up their migrations to the cloud. There’s even more excitement for expansion in the platform now that artificial intelligence (AI) is boosting its value.
All told, that segment accelerated to a blazing 17% growth rate last quarter, beating the pace of Microsoft‘s (NASDAQ: MSFT) Azure. AWS is now running at a $100 billion annual sales rate.
Amazon’s e-commerce business has also returned to fast growth following its post-pandemic hangover. Gains here reflect the company’s unmatchable scale and its huge market share in this attractive industry. Many smaller rivals, including eBay, have described challenges in keeping sales moving higher. It’s great news for Amazon investors, then, that the company is still winning market share and adding to its huge industry lead.
Flash sale
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As Buffett likes to point out, owning a wonderful business won’t do much for your portfolio if you pay too high of a price for it. That’s an elevated risk for most stocks today given the market’s rally over the past year. Amazon has outpaced that rally, too, soaring 80% in the last 12 months compared to a 24% increase in the S&P 500.
That’s no reason to ignore this stellar business, though. Amazon’s shares are priced at 3.3 times sales, making it by far the cheapest member of the Magnificent Seven on this metric. Microsoft is valued at 13 times sales, for context.
Amazon isn’t nearly as profitable as the software giant, of course. Compare its 8% operating profit margin with Microsoft’s blazing 45% rate.
It will be a long time before Amazon’s margins reach anything approaching that level. But profitability is moving in that direction as sales tilt toward the services segment. Patiently holding the stock for the next few years will allow shareholders to benefit from that positive long-term trend.
