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Amazon: A Clear Winner of the Covid-19 Pandemic

Last May, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) revealed a position in Amazon.com Inc. (NASDAQ:AMZN) for the first time. Considering the rich earnings multiples the e-commerce giant was trading around at that time, many value investors were perplexed by this decision and wanted answers from Warren Buffett (Trades, Portfolio). The guru, in an interview with CNBC, said the decision was not made by him but another one of his managers. However, commenting further on the company, Buffett said:



"Amazon has far surpassed anything I would have dreamt could have been done. Because if I really felt it could have been done, I should have bought it. I had no idea that it had the potential. I blew it."



Even if the guru was not behind buying the Amazon shares, the reasoning behind all money managers at Berkshire reflects the wisdom brought to the table by the Oracle of Omaha. In addition, it's more likely that any stock purchase happens under the supervision of both Buffett and Charlie Munger (Trades, Portfolio). Below is a summary of Berkshire's purchasing activity.

Time period

The average trading price of Amazon shares

Number of shares purchased

First-quarter 2019

$1,661.42

483,300

Second-quarter 2019

$1,862.37

54,000



Source: GuruFocus.

Based on these numbers, the conglomerate's average purchase price of Amazon comes to $1,681.61. In comparison, the market price of shares on Wednesday was around $1,852, approximately 10% higher than the cost of the investment. Empirical evidence suggests Buffett typically invests for the very long term and targets triple-digit returns, and certainly not looking for a mere 10% gain. Therefore, chances are Amazon shares are still trading at a steep discount to Berkshire's intrinsic value estimate.

The response of American companies to the novel coronavirus strengthens the case for Amazon.

Working from home is the go-to strategy to fight the spreading virus

Over the last couple of weeks, many companies have advised their employees to stay at home and remotely complete their work. Thanks to the availability of high-speed internet and virtual meeting rooms, the need to physically be at a workplace has reduced tremendously throughout the last decade. Twitter (NYSE:TWTR), Square (NYSE:SQ), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) are some of the largest companies that have requested their employees to work remotely.

The Centers for Disease Control and Prevention, on the other hand, has issued a warning to people at higher risk of contracting the virus.

Source: CDC.

Evidently, avoiding public places is the key to curbing the spread of this virus. This plays into the hands of e-commerce companies. Amazon is the undisputed leader of this industry in America and, according to Bloomberg data, accounted for 39% of the U.S. online market share as of June 2019. With Amazon Prime, consumers can get most products delivered in just a day in most locations in the U.S., and the newly rolled out same-day shipping service will likely provide the company with an additional edge over its competitors. As many Americans will likely stay indoors in the coming months, the e-commerce giant will emerge as a clear winner.

The question asked by many investors is whether this could turn out to be a temporary phenomenon that would inflate the revenue of the company for just a couple of quarters. However, this could turn out to be the tipping point for Amazon as many consumers who previously did not embrace online shopping might realize the benefits of ordering products online and the convenience that comes along with it. According to data from Statista, just 11% of total retail sales in the U.S. were completed online. This indicates the massive leeway for growth available for Amazon and other online store operators.

E-commerce share of total retail sales in the United States

Source: Statista.

When coronavirus fears subside and Americans breathe a sigh of relief, Amazon would be a step ahead in dominating the retail sales of the country. This makes now the perfect time to invest in the company before first-quarter numbers are reported.

Amazon Web Services stand to gain in the long term

The global cloud services market has grown at a stellar pace in the last five years, and Gartner projects the industry to grow exponentially through 2022 as well.

Source: Gartner.

Last April, Gartner's Vice President of Research Sid Nag wrote:


"Cloud services are definitely shaking up the industry. At Gartner, we know of no vendor or service provider today whose business model offerings and revenue growth are not influenced by the increasing adoption of cloud-first strategies in organizations. What we see now is only the beginning, though. Through 2022, Gartner projects the market size and growth of the cloud services industry at nearly three times the growth of overall IT services."



Amazon, once again, is at the core of this high-growth industry and is the leader of the cloud infrastructure market.

Source: Statista.

Now that many American as well as global companies are being forced to consider remote working options, the importance of cloud services will come into the spotlight. Many institutions and corporates that did not embrace these types of initiatives would now be inclined to reconsider their options as the world is heading toward an era where access to files and workspaces on a remote basis is becoming more important than ever. The novel coronavirus will likely give a reality check to companies that are yet to move their operations to cloud servers.

As the leader of the industry, doors will be wide open for Amazon to tap into this billion-dollar opportunity.

Takeaway: Follow Berkshire's lead

The spreading coronavirus will help Amazon from two fronts: higher sales on its main platform and the potential to increase its revenue from its cloud services offering in the long term. Even without Covid-19, which was classified as a global pandemic by the World Health Organization on Wednesday, Amazon was doing a commendable job in doing both these things. However, the outbreak of the virus will accelerate the company's progress, which makes the company attractive to growth investors. At just a 10% premium to what Berkshire paid for Amazon, the shares look like a bargain.

Many value investors might be under the impression that investing in a company with a price-earnings multiple over 70, such as Amazon, might not be as suitable as buying the stock of a company that is trading at a very cheap valuation multiple. However, this is not necessarily true. The true idea of value investing is to find and invest in shares of a business that is trading below the intrinsic value, which cannot be judged entirely by looking at the price-earnings ratio.

Amazon is growing its revenue, earnings and cash flow at double-digits rates, so this justifies the very high per-share ratios associated with the company. Berkshire Hathaway money managers who follow Buffett's rules and advice seem to be in agreement.

There's no better way to end this analysis than to quote Benjamin Graham, who is known as the father of value investing.


"The intelligent investor gets interested in big growth stocks not when they are at their most popular - but when something goes wrong."



Something has certainly gone wrong with the outbreak of the coronavirus. Companies with attractive growth opportunities such as Amazon are penalized by Mr. Market, which is irrational. This has created a window of opportunity for investors.

Disclosure: I do not own any stocks mentioned in this article.

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This article first appeared on GuruFocus.