Amazon (AMZN -0.97%) has been a staple in Berkshire Hathaway's portfolio since 2019. While it might have been chosen by one of Warren Buffett's investing lieutenants who oversee a portion of Berkshire's investments, Amazon has all the hallmarks of a solid business that would appeal to Buffett.
Amazon benefits from massive scale, with $620 billion in trailing revenue. It has millions of loyal Prime members, and Amazon is also the No. 1 cloud services provider. The shares recently reached new highs after the company reported strong financial results in the third quarter and currently trade around $210.
Amazon can be a confusing stock to understand, because the company generates revenue from a lot different things, such as cloud computing, retail, and advertising. It also never looks like a reasonably valued stock. The tremendous run the shares have had over the last decade has pushed its market cap to over $2.1 trillion at the time of writing -- making it one of the most valuable companies in the world. The stock currently trades at an expensive price-to-earnings (P/E) ratio of 45.
Nonetheless, Berkshire Hathaway continued to hold 10 million shares through the second quarter and may continue to report a position in the shares when it updates its investment holdings for the third quarter. Amazon's focus on cutting costs and improving margins can fuel the shares higher, making Amazon a perfect stock to buy for an investor with around $200 to invest this month.
Amazon has room to grow profits
Amazon's Q3 revenue grew 11% year over year, which doesn't seem like an exciting amount of growth. Its online store is still the largest revenue source, but it has been growing at single-digit rates. However, Amazon is making a lot of progress to increase the profit margin of the online retail business.
Management is restructuring the company's fulfillment costs and finding ways to speed up delivery for customers. Faster delivery times reduce transportation costs, which can have a major impact on the company's profit margin. Amazon's operating income more than doubled year over year to $47 billion through the first nine months of the year.
Amazon says it has made hundreds of changes to its inbound network in the U.S. "As we scale and optimize this new design, we expect these changes will further improve inventory placement, offer faster delivery time, save transportation costs, and enable us to increase units shipped per box," CEO Andy Jassy said.
It appears Amazon may be at this for a while. Jassy noted there are more gains to be made with fulfillment efficiency and getting items to customers faster. This is pointing to more growth in the company's profits that could benefit the stock.
The stock is headed for $300
I believe the stock's current valuation still leaves ample room for more upside. Amazon's profits are growing quite fast, with net income up 54% year over year in Q3. This has brought the company's profit margin to an all-time record of 8%.
The Wall Street consensus estimates Amazon's earnings per share to reach $7.47 by 2026. If the stock continues to trade at its current P/E of 45, the share price could potentially reach $338 in two years -- a return of 60% over the current share price of $210. It's worth noting that investors have consistently rated the stock with a high valuation for many years, and it's reasonable to expect that to continue, given the company's robust earnings growth prospects.
It is certainly not too late to invest in Amazon. As the old saying goes, stocks follow earnings, and Amazon is starting to show plenty of earnings growth potential to fuel outstanding returns.
