Warren Buffett backs Amazon as AI demand rises

Warren Buffett's investment company, Berkshire Hathaway, is known for choosing reliable businesses rather than new technology stocks. However, it holds shares in Amazon, making up about 0.7% of its portfolio. Berkshire first invested in Amazon in 2019 and has kept most of its shares despite market changes, even selling a small number last summer. Amazon’s e-commerce business is often what people think of first, but it's not the main reason to invest. In the fourth quarter of 2024, the e-commerce division grew only by 7%. This slow growth is due to tight profit margins in retail. In contrast, Amazon Web Services (AWS), the company’s cloud computing branch, is very profitable and is heavily benefiting from the increasing use of artificial intelligence. AWS helps many clients run their AI workloads without needing to buy expensive hardware. This method allows companies to save money by renting computing power and reducing maintenance costs. AWS’s growth is part of a larger trend, with the cloud computing market expected to expand significantly in the coming years. In 2024, AWS contributed to over half of Amazon's total operating profits while only accounting for 17% of its sales. This demonstrates how much more profitable the cloud segment is compared to e-commerce. As AWS continues to grow faster than retail, it is shifting Amazon's identity toward a cloud computing powerhouse. Despite some concerns about Amazon's stock being overpriced, its valuation has become more reasonable as AWS grows. Currently, the stock trades at a forward price-to-earnings ratio of 31, which is fair for a company in a leading position in its industry. While Buffett may not be buying more Amazon shares soon, investors should consider this opportunity. Amazon’s future looks bright, especially with the strength of its AWS division.