Two of the most closely followed investors on Wall Street are Warren Buffett and Cathy Wood. But the two don’t have much in common.
Buffett has made billions by sticking to a relatively simple investment strategy — looking for companies that generate strong, consistent cash flow and build best-of-breed brands. Most of Buffett’s portfolio Berkshire Hathaway Concentrated in sectors such as consumer goods, financial services, telecommunications, and energy. On the other hand, Wood’s Ark Invest portfolio consists of stocks of advances in emerging fields such as artificial intelligence (AI), genomics, and crypto.
Despite very different approaches to investing, both Wood and Buffett own the “Magnificent Seven” stocks. Amazon (AMZN 0.23%). While the company is best known for its online store, Amazon is also home to a significant cloud computing operation, and has even begun to make inroads into streaming, entertainment, and advertising.
With the stock up more than 70% in the past year, one Wall Street analyst sees plenty of room for growth. Evercore ISI’s Mark Mahaney has a $220 price target for Amazon stock, which represents a roughly 26% upside from Thursday’s close.
Let’s dig into Amazon’s business and understand how the company was able to attract two prominent investors on Wall Street, and why it may have room to run.
How much Amazon stock do Wood and Buffett own?
While both Wood and Buffett’s portfolios hold Amazon stock, it’s important for investors to understand that this is a relatively small position for both investors.
Buffett owns about $1.5 billion in Amazon stock, which represents just 0.44% of Berkshire’s total portfolio. Similarly, Wood’s position in Amazon is in just one of his exchange-traded funds, and the company represents just 0.06% of the fund.
I won’t get bogged down in the specifics of Amazon’s weighting against other holdings for any investor. Wood likely sees Amazon as a hedge for her other technology investments in small businesses. Meanwhile, Oracle of Omaha has long avoided the technology sector in general, so it’s not entirely surprising to see only a small allocation to businesses like Amazon.
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AI could boost Amazon’s entire business.
One thing that makes Amazon so unique is that the company operates across a wide spectrum of end markets. E-commerce and cloud computing are the main drivers of the company’s growth. However, its Amazon Prime subscription service gives consumers access to media like movies and television shows, and its $47 billion advertising business is quickly becoming a major force in the company’s ecosystem.
Providing investors with a deeper level of diversification is only part of the value proposition for Amazon. At a deeper level, advances in AI have the potential to fuel growth across Amazon’s business. The company’s multibillion-dollar investment in OpenAI competitor Anthropic in September could be the key to unlocking new synergies in Amazon Web Services (AWS). Additionally, use cases around generative AI are exploding, and have the potential to bring Amazon’s e-commerce and advertising segments to a new level.
Amazon stock has room to run.
Mahaney’s bullish stance on Amazon isn’t just dependent on the company’s ability to generate strong revenue. Rather, the investments Amazon is making on its platform should lead to significant margin expansion in the long run. As such, the company should be able to generate strong, sustainable cash flow that it can use to reinvest in other areas of growth.
As AI becomes a pillar for the next phase of Amazon’s evolution, I agree with Mahaney’s move that the return to earnings and acceleration in cash flow looks achievable.
Investors seem to be underestimating Amazon’s potential to emerge as a leader in AI. At a price-to-sales multiple of just 3.1, Amazon stock trades at the biggest discount based on that metric in the Magnificent Seven. Investors have the opportunity to acquire shares of Amazon at a steep discount compared to its megacap peers.
AMZN PS ratio data via YCharts
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Adam Spatacco has positions in Amazon. The Motley Fool has positions and recommends Amazon and Berkshire Hathaway. The Motley Fool has a Disclosure Policy.