Investors tend to follow the companies in which Warren Buffett invests. After all, he’s considered by many to be the greatest investor of all time, so naturally, it’s fascinating to see what he buys and sells. Did you know U.S. e-commerce giant Amazon (AMZN) is a Buffett stock?

It’s a position you don’t hear much about because it’s not very big in Buffett’s portfolio. His holding company, Berkshire Hathaway, allocates just 0.5% of its holdings to Amazon, a position Buffett didn’t add until 2019.

But don’t let Buffett’s relatively modest stake in Amazon prevent you from capitalizing on an opportunity sitting in plain sight. Amazon is cheap today, even after shares have risen over 50% this past year.

Here’s how Amazon is poised to make long-term investors richer over the coming years.

The great pandemic-era investment spree
Any investor reading this is likely familiar with Amazon’s e-commerce business. Over 200 million households worldwide subscribe to Amazon Prime, and the company has a whopping 38% market share of all online retail sales in the United States.

Amazon has invested a lot of time and money into building the network of distribution centers, vehicles, planes, and other logistics infrastructure needed to have just about anything in stock and quickly delivered anywhere in the country. Yet, the company was still caught off guard by COVID-19’s boost to online shopping. Amazon responded with a monstrous hike in capital expenditures:

These investments helped take Amazon’s logistics business to a new level. Late last year, Amazon surpassed dedicated logistics companies UPS and FedEx to become the country’s largest delivery company. That mind-blowing size and scale illustrate Amazon’s competitive edge against other online retailers.

Andy Jassy on Amazon’s next potential opportunity
Retail in America is an ocean of opportunity. It’s such a large market, which has helped explain how Amazon has grown seemingly endlessly over the years and generated such blistering investment returns. But Amazon’s not done growing.

CEO Andy Jassy hinted at a potential long-term opportunity in his annual shareholder letter in April. Notably, Jassy underlined the potential demand for same-day delivery services. He discussed how Amazon’s 58 same-day fulfillment facilities have cut time-to-ship readiness for its top 100,000 products to as little as 11 minutes. The success has inclined Amazon to invest in growing its same-day facilities.

Jassy also noted the potential markets that same-day services could help it penetrate, including pharmacy and grocery. Groceries caught my interest because it’s currently a $900 billion-plus opportunity in the U.S. that Amazon has virtually no share in — just about 1%.

Same-day facilities and the eventual spread of delivery drones (Prime Air) could unlock a whole new segment of U.S. retail for a company that has already invested in logistics like Amazon has.

Why shares are still cheap while at all-time highs
Grocery is just one of several needle-moving initiatives Amazon has in the works, meaning earnings growth could continue for years despite Amazon already having a nearly $2 trillion market cap. Shares look pricey, sitting at all-time highs, but I don’t think Amazon is as expensive as some might fear.

Here is why.

Few companies continually invest back into their business as much as Amazon does. The company is always planting seeds for future growth. Capital investments can skew earnings and make it hard to get a good read on the stock’s valuation.

So, consider Amazon’s price versus its operating cash flow instead of looking at earnings. The business generates these cash profits before reinvesting into the company. As you can see below, Amazon’s stock is arguably the cheapest it’s been in years when looking through this lens:

Amazon is really good at getting value from the investments it makes in its business. Its return on invested capital is an impressive 10% on average. The company’s ballooning investments in recent years could result in years of strong earnings growth, especially if it once again finds a new industry to dominate in grocery.

— Justin Pope

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Source: The Motley Fool