It only took Warren Buffett 22 years, but he’s finally corrected a severe error of omission by buying Amazon (NASDAQ:AMZN) stock for Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) equity portfolio. Should you buy Amazon stock now that the legendary investor has finally given in to the allure of Jeff Bezos? Absolutely. Here’s why.
Buffett admitted May 3 that Berkshire bought Amazon stock during the first quarter. How much the company bought, we won’t know until the 13F holdings report is filed in a week.
It’s also important to point out that it wasn’t the 88-year-old that pulled the trigger on AMZN stock but one of either Todd Combs or Ted Weschler, the two men charged with overseeing Berkshire’s equity portfolio.
No matter. It’s semantics. The critical thing is BRK is now an owner of Amazon, what could be one of the best-performing investments of the next 10-20 years.
“Yeah, I’ve been a fan, and I’ve been an idiot for not buying,” Buffett told CNBC. “But I want you to know there are no personality changes taking place.”
One of the best things Buffett and sidekick Charlie Munger did was hire Combs and Weschler. It’s brought an added dynamic to the Berkshire equity portfolio. Long-term, that will be crucial to BRK continuing to grow after Buffett and Munger are out of the picture.
A Value Proposition
As I write this, Amazon is trading within $75 of a $2,000 share price, only the second time in the company’s 23-year history as a public company that it’s traded above this high-water mark. The last time being in September 2018.
Berkshire would have bought its Amazon stock somewhere between a high of $1,823.75 (March) and a low of $1,460.93 (January). Splitting the difference at $1,642.34, the holding company’s sitting on a 17% gain.
Not bad work if you can get it.
Amazon stock currently trades at 65 times forward earnings, almost 20 times book value, four times sales, and 28 times cash flow. All would be considered to possess growth-stock type valuation numbers.
Buffett insists that both Combs and Weschler adhere to value principles despite the appearance to the contrary.
Specifically, he’s suggesting that value has more to do with the price you pay today versus the amount you’ll receive in the future. It’s essentially “putting out money now to get more later on” based on the idea that Berkshire’s getting AMZN stock well below its intrinsic value.
If you know anything about Berkshire, you know that it’s the most patient investor on the planet. Therefore, if you were interested in owning Amazon before Buffett’s admission, you have to be a buyer today.
No ifs, ands, or buts.
The Bottom Line on Amazon Stock
Earlier this year I reiterated my call for Amazon to hit $10,000. Only this time (I first made the call in January 2018) I suggested it could hit $10,000 by 2023, two-and-a-half years earlier than my original projection.
I believe that Amazon’s shares will continue to move higher as it grows its advertising business and Amazon Go cashierless convenience stores. If it’s successful on both these fronts, $10,000 will seem like a very conservative number.
So, if you see Amazon ruling the world but are afraid to bet on its stock, Berkshire Hathaway makes a popular alternative because it’s the world’s biggest and cheapest mutual fund in disguise.
Sure, you might take a hit down the road when Buffett dies, but if you put some cash away between now and then, you’ll get a once-in-a-lifetime opportunity to buy some more at a severe discount
Buy Amazon or Buy Berkshire Hathaway. Either way, in ten years, you’ll have carried the day.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
