These 2 Billionaires Just Loaded Up on Amazon Stock. Should You?
Billionaire investors, including Bill Ackman and Chase Coleman, have recently increased their stakes in Amazon, signaling bullish sentiment. Ackman invested $1.28 billion, while Coleman raised his position by 62%. Despite Amazon's slower revenue growth of 13% year-over-year, its operating income grew by 31%, driven by Amazon Web Services (AWS) and advertising services. AWS, contributing significantly to operating income, and the fast-growing advertising segment are key to improving profit margins. This trend suggests that Amazon remains a solid investment opportunity, aligning with the strategies of these prominent investors.
Amazon (AMZN -1.46%) is a popular stock pick among billionaire investors. Warren Buffett and Berkshire Hathaway have owned Amazon for a long time, although they haven't added any more shares to their portfolio in a while. Other billionaires who have been increasing their positions lately include Bill Ackman at Pershing Square and Chase Coleman at Tiger Global Management.
During the second quarter, Ackman created a brand-new position in Amazon, purchasing $1.28 billion worth of shares in the quarter. This puts Amazon at a 9.3% position in his hedge fund, a clearly bullish bet.
Coleman already had an Amazon position in his portfolio, but hadn't made a meaningful addition to it in a few quarters. During Q2, the fund increased its position by 62%, another bullish sign.
So, why are these billionaire hedge fund managers so bullish on Amazon? It boils down to Amazon's rapidly rising margins.
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Amazon's revenue growth looks fairly slow
On the surface, Amazon appears to be a lackluster growth stock. Amazon's revenue rose by only 13% year over year, which is slower than some of its big tech peers, but not significantly so compared to the broader market. Still, Amazon has been in this high-single-digit to low-double-digit growth rate range for some time.
AMZN Revenue (Quarterly YoY Growth) data by YCharts
That's not a recipe for a stock that can crush the market over the long term, but if you're going by that, you're looking at the wrong metric. Instead, investors should focus on Amazon's operating profit growth. As Amazon becomes a more mature business, its profits must rise faster than revenue, which can keep Amazon in the discussion of growth stocks.
Although Amazon's operating profits aren't growing as fast as they once were, the company is still posting impressive growth.
AMZN Operating Income (Quarterly YoY Growth) data by YCharts
To be sure, 31% operating income growth is impressive and places Amazon alongside many of the highest-performing tech stocks. But how is Amazon achieving outsized operating profit growth compared to revenue growth?
AWS and advertising services are pushing Amazon's profit margins higher
Although many investors view Amazon as an e-commerce giant, it has multiple other facets to its business. Two of the most important for Amazon's profitability are Amazon Web Services (AWS) and advertising services.
AWS is Amazon's cloud computing division, which is experiencing a massive growth surge as artificial intelligence (AI) workloads come online. At its core, Amazon is building excess computing power and renting that out to clients to run workloads on. This is an expensive business, which is why Amazon's free cash flow is down, but it could yield massive returns on its investments years down the road.
AWS is a crucial component of Amazon's business. Despite accounting for 18% of sales in Q2, AWS generated 53% of Amazon's total operating income. Clearly, AWS is a critical piece for Amazon, and its continued success is key to Amazon's stock performance.
Advertising services are another huge part of Amazon. Unfortunately, Amazon doesn't break out the operating margin for this segment, as it's grouped with its broader commerce divisions. Still, this segment has been Amazon's fastest-growing over the past few years. In Q2, ad services grew 23% year over year, marking a reacceleration of growth compared to the last few quarters.
Although it's impossible to calculate what the margins are for this division, it's safe to assume they are quite high, considering that companies that derive a ton of money from advertising (like Meta Platforms or Alphabet) have impressive operating margins.
Ad services are a key part of Amazon, and it's no coincidence that its commerce divisions' operating margins have improved rapidly during the same time ad services have risen to prominence.
Although both AWS and advertising services have had an impressive run over the past few years, their growth is far from over. As a result, Amazon's operating margins are expected to continue improving, which will enable outsized profit growth compared to revenue growth. This is a winning combination, and it's no wonder that billionaires like Chase Coleman and Bill Ackman have recently added shares. I think Amazon is a solid investment right now, and following in the footsteps of these two legendary investors is a smart idea.
