Source: PaxForex Premium Analytics Portal, Fundamental Insight
Last week, Amazon's Q3 report caused its stock to plummet after the company issued weak guidance for Q4. The quarter itself wasn't too bad. Revenues were up 15% YoY, which is good in the current market environment and in line with the forecast of 13-17%. Operating income of $2.5 billion was in line with the consensus, which was between $0 and $3.5 billion. Amazon Web Services (AWS) growth has begun to slow after many quarters of continuous growth, a natural consequence of reduced customer spending.
The company's management predicts that Q4 revenue will grow by 2-8%. Q4 includes an essential holiday spending season, and experts were anticipating more, so it's a disappointment.
But the company's management isn't worried. The company has a lot of plans to increase sales this season, and it's concentrated on the customer experience. Let's take a look at why this company is one of Buffett's favorite stocks and how it's showing up now.
Warren Buffett has given a lot of wise advice over the years about how to invest wisely. There is no secret formula he uses for buying stocks or acquiring companies for his holding company Berkshire Hathaway, but we can get an idea of what he thinks are the key characteristics of a worthy candidate for investment.
One such characteristic is the "moat." It is a competitive advantage, or basically anything in the business that allows it to stand out from the competition and protect its business. He clarifies this with the additional detail, "Long-term competitive advantage in a stable industry is what we look for in a business."
Amazon dominates e-commerce with 38% of all e-commerce sales, a number that has remained largely stable over the past few years despite an attack of new e-commerce companies. Prime's more than 200 million members, who pay $139 annually, rely on it for a myriad of needs, and other companies that have tried to challenge it still haven't come close to really competing. Walmart, for example, has launched its own annual service and has a 6.3 percent share of the e-commerce market. Buffett, or more likely one of his investment managers, bought Amazon stock in 2019. Because "stable business" is part of the equation, Buffett may not have considered Amazon a purchase before e-commerce proved its business value.
Amazon continued to invest in customer experience in Q3, and while the company may struggle in the coming months, it's those investments that help it stay broad-based. As Chief Financial Officer Brian Olsavsky said during the Q3 earnings conference call: "We remain focused on creating a fantastic customer experience, and we believe that customers first is the only reliable way to create long-term value for shareholders."
But that's not all.
Buffett has been expanding his own company for decades. Investors talk about which stocks he buys for Berkshire Hathaway, but Buffett actually likes to buy entire companies if he thinks they're great. Did you know that Berkshire Hathaway owns 65 companies? That's more than the stock it owns, which is about 40. Some of the companies you may recognize are the Duracell battery company and the Benjamin Moore paint company.
Here's what Buffett says about business expansion:
There's no rule that you have to put your money where you made it. What's more, it's often a mistake. The really great companies that make huge profits on tangible assets can't reinvest most of their profits internally for long periods of time with high returns.
Amazon follows this model very closely. It uses its huge e-commerce business to fund other businesses that are often more profitable than its core business. AWS is the most obvious example. AWS has been providing most of the company's operating income for some time.
The company has also made many entire acquisitions, such as its upcoming purchase of iRobot. Some of these acquisitions are integrated into Amazon's platform, such as movie studio MGM, whose movie library has been added to the Prime library. iRobot is an example of an entire company that Amazon will leave operating on its own.
Buffett invests in companies he thinks have high long-term profit potential. He has said that his preferred holding period is "forever." Amazon's moat and capacity to grow into new areas can give investors assurance that it has growth plans for the foreseeable future. Amazon stock is down more than 40% so far in 2022, and investors may see this decline as an opportunity to buy the stock.
As long as the price is below 110.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 92.03
- Take Profit 1: 85.00
- Take Profit 2: 70.00
Alternative scenario:
If the level of 110.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 110.00
- Take Profit 1: 121.00
- Take Profit 2: 135.00
