Israel Englander of Millennium Management and David Tepper of Appaloosa rank among the most successful hedge fund managers in recent decades -- and both have a spot on the Bloomberg Billionaires Index. Those bona fides put Englander and Tepper in a rarified class, and both have been buying shares of Amazon (AMZN 2.19%) throughout the bear market.
In the past year, Englander upped his stake in the company by 4,600%, making Amazon his largest holding. Meanwhile, Tepper increased his position by 2,200%, which made Amazon his second-largest holding. Those purchases send a clear message: Two of the most successful hedge fund managers see Amazon as undervalued ahead of the next bull market.
Here's why this growth stock is worth buying.
Amazon is a leader in e-commerce
Amazon's retail roots reach back to the mid-'90s when the company was nothing more than an online bookstore. But it has since evolved into a retail behemoth. The Amazon marketplace receives nearly four times as many visits as its closest competitor, and it accounted for 38.2% of online retail sales in North America and Western Europe last year.
That success is underpinned by brand authority and a powerful network effect. Merchants are naturally drawn to Amazon because its marketplace is so popular with consumers, and each new merchant makes the marketplace more attractive to consumers by bringing more inventory to the platform. Amazon has accelerated that flywheel effect by providing merchant solutions for fulfillment and logistics. Those products make its marketplace an even more compelling option.
So what? Global retail e-commerce sales are expected to grow at 13.6% per year through 2030, according to Ameco Research. Amazon will undoubtedly benefit from that tailwind.
Amazon is a leader in cloud computing
Amazon Web Services (AWS) is the gold standard in cloud computing. The company started providing cloud infrastructure and platform services (CIPS) in 2006, two years before Microsoft and Alphabet, and it has dominated the market ever since. To this day, AWS offers a broader and deeper set of CIPS capabilities than any other provider, and the company holds nearly as much market share as Microsoft and Alphabet combined.
AWS excels in many sub-categories of cloud computing, but its success in artificial intelligence (AI) and machine learning is particularly noteworthy. Earlier this year, consultancy Gartner recognized AWS as the leader in cloud AI developer services, and the company has since expanded into generative AI software with the launch of Amazon Bedrock and Amazon CodeWhisperer. The former provides access to pre-trained models that help clients build generative AI applications, and the latter leans on generative AI to write code for the purpose of accelerating software development.
So what? Cloud computing revenue is expected to increase by 14.1% annually through 2030, and AI software revenue is expected to grow at a 42% rate over that period. Those trends should translate into strong growth for AWS.
Amazon is gaining share in digital advertising
Amazon is the third-largest adtech company in the world. It accounted for 6.7% of global digital ad spending last year, and that figure will reach 8% by 2024, according to eMarketer. But the industry leaders Google and Meta Platforms are projected to lose share over the same period.
Amazon's success in digital advertising arises from (and is protected by) its success in retail. Millions of consumers shop on the Amazon marketplace each day, generating more data with every click and purchase. In other words, Amazon has two things that every advertiser values: a large audience and lots of data. That means the company should have a thriving adtech business for as long as its retail business remains strong, and it will likely gain ground as brands diversify ad spending beyond web properties owned by Google and Meta.
So what? Adtech revenue is projected to climb at 13.7% per year through 2030, according to Grand View Research. Amazon should benefit from that tailwind.
Amazon stock looks cheap
Amazon struggled with economic headwinds last year. Revenue growth slowed as high inflation chewed away at consumer spending, and the company reported its first loss in eight years as rising costs put pressure on the bottom line. Disappointing financial results and recession fears caused many investors to lose confidence in Amazon during the bear market. The stock is still down 30% from its high.
The silver lining to that sell-off is valuation. Amazon has a strong presence in e-commerce, cloud computing, and ad tech -- three markets expected to grow at roughly 14% per year through 2030 -- yet its shares currently trade at 2.5 times sales, a discount to the five-year average of 3.5 times sales and a reasonable value given the opportunities that lie ahead. That's why this growth stock is a buy in advance of the next bull market.
