Investors tend to follow companies that Warren Buffett invests in. After all, many consider him the greatest investor of all time. So it’s naturally fascinating to see what he buys and sells. Did you know the American e-commerce giant Amazon (NASDAQ:AMZN) is a Buffett stock?
This is a position you don’t hear much about because it’s not very important in Buffett’s portfolio. Its holding company, Berkshire Hathawayonly allocates 0.5% of its holdings to Amazon, a position Buffett only added in 2019.
But don’t let Buffett’s relatively small stake in Amazon stop you from capitalizing on a high-profile opportunity. Amazon is cheap today, even after shares rose more than 50% last year.
Here’s how Amazon is poised to make long-term investors rich in the years to come.
The Great Investing Frenzy of the Pandemic Era
Any investor reading this is likely familiar with Amazon’s e-commerce business. More than 200 million households worldwide subscribe to Amazon Prime, and the company has a whopping 38% market share of all online retail sales in the United States.
Amazon has invested a lot of time and money building the network of fulfillment centers, vehicles, planes, and other logistics infrastructure needed to have just about everything in stock and delivered quickly to anywhere in the country. Yet the company was caught off guard by the COVID-19-driven surge in online shopping. Amazon responded with a monstrous increase in its capital expenditures:
These investments helped propel Amazon’s logistics business to a new level. Late last year, Amazon overtook dedicated logistics companies UPS And FedEx to become the largest delivery company in the country. This breathtaking size and scale illustrates Amazon’s competitive advantage over other online retailers.
Andy Jassy on Amazon’s Next Potential Opportunity
Retail in America is an ocean of opportunity. It’s such a large market, which has helped explain how Amazon has grown seemingly endlessly over the years and generated such staggering returns on investment. But Amazon hasn’t stopped growing.
CEO Andy Jassy hinted at a potential long-term opportunity in his annual letter to shareholders in April. Jassy particularly highlighted the potential demand for same-day delivery services. He explained how Amazon’s 58 same-day fulfillment facilities reduced the time to prepare to ship for its top 100,000 products to just 11 minutes. This success prompted Amazon to invest in expanding its same-day facilities.
Jassy also highlighted potential markets that same-day services could help it penetrate, including pharmacies and grocery stores. Grocery caught my interest because it is currently a $900 billion-plus opportunity in the United States that Amazon has virtually no stake in – just about 1%.
Same-day installations and the eventual widespread use of delivery drones (Prime Air) could open up a whole new U.S. retail segment for a company that has already invested in logistics like Amazon.
Why stocks are still cheap even though they hit all-time highs
The grocery store is just one of many needle movement initiatives Amazon has in the works, meaning profit growth could continue for years even though Amazon already has a market cap of nearly $2 trillion. Stocks look expensive, hitting all-time highs, but I don’t think Amazon is as expensive as some might fear.
Here’s why.
Few companies continually reinvest in their business as much as Amazon. The company is still planting the seeds for future growth. Capital investments can distort earnings and make it difficult to read stock valuations correctly.
So consider Amazon’s price relative to its operating cash flow instead of looking at profits. The company generates these profits in cash before investing them back into the business. As you can see below, Amazon stock is arguably the cheapest it’s been in years if you look at it this way:
Amazon knows very well how to profit from the investments it makes in its business. It is return on invested capital is an impressive 10% on average. The company’s growing investments in recent years could translate into years of strong profit growth, especially if it once again finds a new dominant sector in grocery.
Should you invest $1,000 in Amazon right now?
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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. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, Berkshire Hathaway and FedEx. The Motley Fool recommends United Parcel Service. The Mad Motley has a disclosure policy.
This Ridiculously Cheap Warren Buffett Stock Could Make You Richer was originally published by The Motley Fool
