I trounced Warren Buffett this year. No, the Oracle of Omaha and I didn’t get into a wrestling match or anything like that. However, my investment portfolio handily beat Buffett’s Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) performance in 2020.
Am I getting a big head about my win over the billionaire? Not at all. Most investors likely blew past Berkshire’s measly gain this year. I also realize that one year of outperformance (or even a few years) doesn’t hold a candle to Buffett’s long-term track record.
The truth is that Buffett remains a legend in the investing world. It pays to stay abreast of the stocks that he likes. I personally own several stocks in Berkshire’s portfolio — including Berkshire itself. But if I could buy only one Warren Buffett stock for 2021, it would have to be Amazon.com (NASDAQ:AMZN).
A wide moat
Over the years, Buffett has uttered many wise statements that investors would do well to heed. I think arguably the best of the bunch have been his explanations about buying the stocks of companies with wide moats — strong and sustainable competitive advantages.
I think that Amazon’s moat is as wide as the river the company is named after. Consider three of the top examples of economic moats:
- Cost advantage
- Network effect
- High switching costs
Amazon has dominated the e-commerce market in large part because of its cost advantages. The bigger that it’s grown, the more economies of scale it’s built. It’s not surprising in the least that the brick-and-mortar retailers faring best against Amazon have been large discount chains such as Walmart.
A company claims a network effect when the value of the products or services that it provides increases as more people use them. Does Amazon have a network effect? Absolutely. For example, as more products become available on its platform, more customers become interested in shopping on Amazon. The more customers shop on Amazon, the more retailers are attracted to offering their products on the platform.
As for high switching costs, think about Amazon’s ecosystem. Customers sign up for Prime to gain access to free shipping. But Prime also provides other perks such as Prime Video and Prime Music. It’s also easy to order products from Amazon using its Alexa artificial intelligence (AI) assistant. The more a consumer is plugged into this ecosystem, the higher the costs are to leave it.
Multiple ways to grow
Another great thing that I love about Amazon is that it has multiple ways to grow. Its history is chock-full of examples of this. In the early days, Amazon was known only as an online bookstore. It then expanded into offering additional products online. The company later moved into cloud hosting, becoming the biggest player in the fast-growing market.
Even though Amazon now dominates e-commerce, it still has a lot of room for growth. In the third quarter of 2020, e-commerce sales made up only 14.3% of total sales, according to the U.S. Census Bureau. There are also plenty of opportunities to expand in cloud hosting as more organizations move their apps and data to the cloud.
I’m especially excited, though, about Amazon’s moves into brand-new markets. The company officially launched Amazon Pharmacy in November. Customers can buy prescription medication online. Amazon Prime members receive tremendous savings (up to 80% on generic drugs when paying without insurance) plus free two-day delivery. Look for even faster delivery in the future, especially if Amazon integrates its pharmacy business with its Whole Foods grocery stores.
Reports have also circulated that Amazon could be about to jump into the telehealth market. It already offers telehealth services to its employees in the Seattle area. Expanding these services to other employers and consumers would be a natural next step.
Amazon has also thrown its hat into the self-driving car technology arena with its acquisition of Zoox earlier this year. Zoox recently unveiled a “robotaxi” and plans to start an app-based ridesharing service in the not-too-distant future.
But what about…
Two potential gotchas often come up when Amazon is discussed as an investing option: valuation and the possibility the business could be broken up by antitrust regulators. Are these issues worrisome? I don’t think so.
Sure, Amazon isn’t a value stock like Buffett has preferred in the past. Its shares currently trade at nearly 60 times expected earnings. But Amazon has sported even higher price-to-earnings multiples in the past and still delivered strong growth. One of my biggest investing regrets is that I waited to buy Amazon because I thought the stock was too expensive. That turned out to be an expensive mistake.
As for the antitrust threat, I have two thoughts. First, I don’t think Amazon will be broken up. My hunch is that it’s more likely that the company will have to make some changes to the way it conducts business. Second, even if Amazon was forced to split into multiple companies, I firmly believe that the sum of the parts would be worth more than Amazon is worth today.
I don’t know if I’ll continue to trounce Warren Buffett in the future. However, I’m pretty sure that Amazon will keep on beating Berkshire Hathaway’s performance. It’s a great stock to buy for the long term — exactly the kind of stock that Buffett loves.