In 2019, CEO Warren Buffett’s company Berkshire Hathaway finally initiated a position in Amazon (AMZN) stock. It’s a move that Buffett regretted not making sooner, and he went so far as to publicly call himself an “idiot” for not buying shares earlier in the market-crushing tech company’s history.

Given his own incredible track record of market-beating success, it’s fair to say that the Oracle of Omaha was being a bit hard on himself, but it’s easy to see why he regretted missing out on much of the company’s incredible run.

Here’s the kicker: With the stock trading down roughly 45% from its high, investors actually have an opportunity to purchase Amazon stock at a price that’s likely not much higher than what Buffett last bought it at. Read on to see why buying the tech giant’s shares early in 2023 would be a great move.

Why has Amazon stock gotten so cheap?
Before diving into the characteristics and qualities that make Amazon stock a great long-term investment, it’s worth summarizing why the company’s valuation has been under pressure lately.

Like many other tech companies, Amazon has seen its valuation compressed by the combination of high inflation, rising interest rates, and concerns about a prolonged economic downturn. But the company has also been facing some business-specific headwinds.

In response to pandemic-driven demand, Amazon made some big investments to further expand infrastructure and operational capacity for its e-commerce business. Not only have pandemic-related tailwinds since receded, but the company has also faced substantial adverse impacts from rising fuel and shipping costs.

Adding another bearish pressure, the Amazon Web Services (AWS) cloud-infrastructure services segment is seeing some growth deceleration in conjunction with the tougher overall macroeconomic backdrop. And it too is facing margin contraction from high energy costs and other inflationary pressures.

This table tracks operating income margins for the AWS segment over the last six quarters:

Falling margins for the company’s key profit-driving segment are unfortunately occurring in tandem with a big slowdown for overall sales growth at the company.

Amazon’s guidance for Q4 calls for revenue between $140 billion and $148 billion, suggesting sales growth of just 4.8% growth at the midpoint of the target. On the other hand, Amazon’s core business pillars continue to look well positioned in terms of long-term performance, and it would be a mistake for investors to become overly fixated on near-term performance headwinds.

Don’t underestimate this incredible company
Despite the impact of macroeconomic pressures currently shaping performance, the AWS cloud business still has a tremendous runway for long-term growth. The company’s infrastructure provides foundation-level services for much of today’s web and applications economy, and it will almost certainly remain at the forefront of pushing the digital revolution forward.

Many investors seem to be underestimating the e-commerce business as well, particularly because automation of warehouse operations and deliveries stand to make the segment much more profitable over time.

Throughout its history in the e-commerce space, Amazon has largely been focused on building a massive sales base and an unparalleled operating footprint. There have been periods where sales have boomed and margins have been relatively strong, but the company’s priorities have generally been aligned with building a massive operational and customer-base footprint that set the stage for ultra-long-term growth opportunities.

Additionally, Amazon has opportunities to leverage the huge resource and distribution advantages it has built in online retail to play a disruptive role in the healthcare space and other categories. The company’s recently announced RxPass will allow for the filling of unlimited generic prescription drugs at just $5 a month extra for Prime subscribers, suggesting another big step forward in the push to make its online-retail platform an “everything store.”

A valuation that leaves room for fantastic returns
With Amazon valued at less than 1.9 times expected forward sales, the company looks significantly undervalued, given its category-leading positions in highly influential industries.

The overall business will swing back to posting much better overall profit margins as challenges ease and reward from investments in growth initiatives begin to play a bigger role in shaping bottom-line performance.

Despite what recent stock performance might suggest, Amazon remains one of the best companies in the world, and there’s very little indication that its long-term growth trajectory has been derailed. With the stock down big from its peak and huge expansion opportunities still ahead, there’s a very good chance that investors who buy the stock at today’s prices will go on to enjoy stellar returns.

— Keith Noonan

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Source: The Motley Fool