U.S. Markets open in 22 mins

Buffett Finally Picks Amazon: Why to Do the Same With ETFs

Sanghamitra Saha
Amazon's (AMZN) strengthening Prime enabled services and benefits, and expanding AWS services portfolio are likely to drive second-quarter 2019 results.

It is always better to be late than never.

Warren Buffett said Berkshire Hathaway Inc. has purchased shares of Internet retailing giant Amazon.com Inc. AMZN for the first time. Buffett admired Amazon chief Jeff Bezos in the past and even commented “I've been an idiot for not buying" (Buffett told CNBC).

Buffett said the purchase was made by one of his investment managers, Todd Combs or Ted Weschler, and details would be disclosed later this month in Berkshire's quarterly report of its U.S. stock holdings, per business standard.

In any case, markets always take note of what Buffett’s organization is purchasing. And if it is Amazon, on which Buffett has never shown interest (though he praised a lot), market participants will surely start digging into details and try to find out any value in it. After all, Buffett is known for value investing.

The stock has gained 26.5% this year (as of May 2, 2019) against 22.5% gains put up by the non-food Retail-Wholesale market.

Let’s take a look at should you really invest in Amazon at the current level, following Buffett or it is not at all value stock.

Huge Earnings Beat in Q1

Amazon is experiencing slowing revenue growth but expanding profit margins as its push into advertising and cloud computing is paying off. Earnings per share came in at $7.09, easily beating the Zacks Consensus Estimate of $4.61 and more than double the year-ago earnings of $3.27.

Revenues climbed 17% year over year to $59.7 billion. In particular, revenues from the cloud computing business — Amazon Web Services — surged 41% year over year to $7.7 billion (read: ETFs in Focus on Amazon's Q1 Earnings Beat, Soft Guidance).

Solid Zacks Sector & Industry Rank

Investors should note that the AMZN stock has a Zacks Rank #3 (Hold). It belongs to a top-ranked Zacks sector (top 44%) and industry (top 36%).

What Do Indicators Say About Amazon’s Value Status?

Going by valuation metrics, P/E (ttm) of AMZN is 79.4 times versus the industry-average of 28.9 times. Forward P/E of AMZN is 71.5 times versus industry score of 29.7 times. It means Amazon is pretty overvalued.

But then, many high-growth companies possess elevated valuation. Estimated 3-5 year EPS growth of Amazon is now 33% versus 13.5% of the industry measure. Projected earnings growth of Amazon for fiscal 2019 and 2020 is 32.1% (versus industry average of 11.2%) and 44.2% (versus industry average of 21.4%), respectively.

Return-on-equity of Amazon is 28.9%, again higher than industry average of 20.5%. Plus, return-on-capital of Amazon (18.3%) is higher than the industry measure (13.5%). Amazon has an EV/EBITDA of 30.1, which is above 19.7 times of the industry-average. Investors should note that EV/EBITDA ratio values the “worth of the entire company” and thus indicates Amazon’s still-higher worth compared with its industry peers.

Bottom Line

Amazon shares lack value as the company has a Zacks Value Score of F. It also has a Momentum Score of F. Overall, it has a VGM score of F.

The company offered downbeat revenue guidance for the ongoing quarter. For the second quarter of 2019, the company expects revenues to grow 13-20% to $59.5-$63.5 billion. The mid-point of the range is slightly below the current Zacks Consensus Estimate of $62.53 billion.

In short, Amazon is a pricey stock but has industry-beating long-term growth potential. Thus, investors intending to follow Warren Buffett but still wary of Amazon’s high valuation and soft guidance may take the ETF route. This is because ETFs help investors to mitigate one company’s average performance with the other companies’ stellar results.

Below we highlight a few ETFs with heavy exposure to Amazon for investors seeking to bet on the stock with much lower risk.

Amazon-Heavy ETFs in Focus

Fidelity MSCI Consumer Discretionary Index ETF (FDIS– AMZN is at the helm with 25.1% weight. The fund has a Zacks Rank #2 (Buy).

Consumer Discretionary Select Sector SPDR Fund (XLY) – AMZN holds the top spot with 24.2% weight. The fund has a Zacks Rank #2 (read: What Sell in May? Buy These ETFs Instead).

ProShares Online Retail ETF (ONLN– AMZN occupies the first location with 23.7% weight.

Vanguard Consumer Discretionary ETF (VCR– AMZN occupies the first spot with 22.7% weight. The fund has a Zacks Rank #2.