Warren Buffett beat the market (again) in 2022. However, he didn’t get any help from Amazon (NASDAQ: AMZN). Shares of the e-commerce and cloud-hosting giant plunged nearly 50% last year.
That’s now water under the bridge. Amazon is off to a great start in 2023, with its shares soaring more than 20% year to date. It should have even more room to run. Here’s why Amazon could be the best Buffett stock to buy in February.
What Buffett likes
If you look at all of the stocks in Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) portfolio, you’ll find some common denominators. The investing icon likes stocks that possess several attributes.
Back in 1995, Buffett stated in a Berkshire Hathaway shareholder meeting, “The most important thing in evaluating businesses is figuring out how big the moat is around the business.” Nearly three decades later, he still likes stocks with strong moats — competitive advantages that help fend off rivals like moats protected castles in the middle ages.
In that same shareholder meeting, Buffett also said, “We are trying to look at businesses in terms of what kind of cash can they produce.” In other words, he wants to buy stocks that generate strong free cash flow.
Not every stock in Berkshire’s portfolio looks like a great bargain right now, based on commonly used valuation metrics. However, Buffett remains a value investor at heart. He only buys stocks that he believes are valued attractively, compared to their ability to grow earnings.
Amazon delivers on all of the criteria Buffett likes to see in a stock. That’s especially true with the company’s moat. Amazon arguably has one of the strongest moats of any business in the world.
For example, no other competitor can claim the economies of scale that Amazon has with its logistics and transportation operations or its cloud-hosting business. The company’s low costs give it a big advantage. Amazon founder Jeff Bezos once said, “Your margin is our opportunity.”
Then there’s Amazon’s network effect. The more suppliers who sell products on its site, the more customers it attracts — and vice versa.
At first glance, you might not think that Amazon checks Buffett’s box of generating strong free cash flow. In the 12 months ending Sept. 30, 2022, the company generated negative free cash flow of $19.7 billion. However, the primary reason for the negative number is that Amazon doubled its network capacity since 2020.
Bill Miller, who beat the market for 14 consecutive years when he was at Legg Mason, predicts that Amazon will generate free cash flow of $60 billion by 2025. With the company already cutting its capital expenditures and reducing staff, I suspect that the $60 billion target by 2025 is attainable.
That brings us to valuation. Miller thinks that Amazon is a no-brainer stock to buy because the company’s cloud-hosting business practically justifies the current market cap all by itself. Amazon’s shares are also trading at a historically low price-to-sales multiple.
To be fair, other stocks could be viewed as the best Buffett stock to buy in February. For example, Buffett himself has invested heavily in recent months in Taiwan Semiconductor Manufacturing and Occidental Petroleum. It’s possible that these or other stocks in Berkshire’s portfolio could outperform Amazon this year.
But Amazon is certainly a strong contender for the honor. Investors who add the stock to their portfolios in February will probably be really glad they did five years from 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. Keith Speights has positions in Amazon.com and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon.com, Berkshire Hathaway, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.