Warren Buffett Drops Walmart Stock, Eyes Amazon Stock

AMZN StockAmazon Stock vs. Walmart Stock

The world is changing. I never thought we’d see the day that Warren Buffett dumps shares of Wal-Mart Stores Inc (NYSE:WMT); sadly, all good things come to an end.

Buffett sold $900.0 million worth of Walmart stock lately, but that doesn’t mean he’s gone soft on retail. He has shown great respect for Amazon.com, Inc. (NASDAQ:AMZN), which raises the question…

should Warren Buffett invest in Amazon stock?

It’s an open secret that Buffet thinks highly of Amazon CEO Jeff Bezos. Unlike AMZN stock bears, many of whom think Amazon stock is a bubble waiting to burst, Buffett understands the company’s endgame. He sees what makes Amazon so special.

Just listen to him talking about Jeff Bezos last year.

“We haven’t seen many businessmen like him,” Buffett said on CNBC. “Overwhelmingly, he’s taken things you and I’ve been buying and he’s figured out a way to make us happier buying those products, either by fast delivery or prices or whatever it may be, and that’s remarkable.” (Source: “Warren Buffett says he’s in awe of Jeff Bezos’ genius,” CNBC, May 2, 2016.)

That’s high praise from the “Oracle of Omaha.” I’m sure some part of his optimism has to do with the chart below:

WMT_AMZN

Chart courtesy of StockCharts.com

As you can see, AMZN stock soared 2,015% in the last 10 years. By comparison, WMT stock gained a meager 47%, meaning that Buffett’s pocket book was directly affected. He would have made a much bigger return if Amazon had never existed. Many people would have resented Bezos for this, but Warren Buffett isn’t that kind of guy; he was impressed.

Should Warren Buffett Buy Amazon Stock?

While it would be strange to see Buffett embrace a tech stock, it wouldn’t be unprecedented. He famously invested in International Business Machines Corp. (NYSE:IBM), arguing that it was more of a service company than a tech one. That was his way of justifying the investment.

This aversion to tech stocks comes from Buffett’s self awareness. He doesn’t invest in things he can’t understand. You won’t find him investing in semiconductor or solar stocks because those are too far out of his wheelhouse. He simply doesn’t know how to sort the wheat from the chaff in those sectors, so there’s no point in him trying.

But Amazon is different; it’s something Buffett understands. When you strip away all the data and tech, Amazon is essentially a company that made its bones selling cheap on the internet.

Through the magic of Jeff Bezos, it managed to push onward and outward into different areas, but there’s always a specific profit motive in mind. Amazon isn’t experimenting with technology like scientists in a lab, it is a business that competes with other businesses, and usually wins.

Take a look at this chart:

Retail-Sales-Growth-Chart

According to some of the most recent economic data available, Amazon (the red bars in the above chart) accounts for more than 40% of the annual expansion in retail sales. Walmart (the purple bars) still occupies a decent chunk of that growth, but it’s getting overrun by Amazon.

To be clear, Walmart’s revenue is still inching upward. The problem is that consumers are spending more of their money online, not in physical stores. This puts WMT stock on the wrong end of history.

Sorry to be the bearer of bad news, but it’s pretty obvious that long-term trends favor Amazon stock. Walmart stock has had its day in the sun. Our job as investors is to peek around the corner, to consider what will happen tomorrow; our job is not to live in the past.

Everyone knows that online shopping is Amazon’s home turf, so the question is: why would any rational-thinking person believe that Walmart can beat Amazon online? The truth is that smart investors don’t think that. Warren Buffett certainly doesn’t think that.

Buffett is on the record saying that Amazon doesn’t need to fear the competition.

“There’s certain people that you do not want to try and beat at their own game,” said Buffet in the same CNBC interview. “Certainly Jeff Bezos would be number one. I mean, that would be like me playing chess with Bobby Fischer 40 years ago; it would be all over on the first move.” (Source: Ibid.)

Berkshire’s Top Five Holdings

Buffett first bought shares of WMT stock in 2005. He stuck out that position for over 10 years, but it’s now clear that Amazon stock is the place to put his money. He hasn’t officially revealed a stake in AMZN stock, but that’s how Buffett operates.

We only discover what he owns a stock months after the fact, when he is compelled to disclose his holdings in a Form 13F filing. I’m keeping a close watch on these forms as they are submitted to the U.S. Securities and Exchange Commission (SEC). I’m almost certain that  AMZN stock will pop up there soon.

Here are Buffett’s top five holdings right now:

Berkshire Hathaway — Biggest Holdings

    

Company

Volume

Value

% of Portfolio

KHC

Kraft Heinz Co

325,634,818

$28.4B

19.2

WFC

Wells Fargo & Co

479,704,270

$26.4B

17.9

KO

The Coca-Cola Co

400,000,000

$16.6B

11.2

IBM

International Business Machines Corp.

81,232,303

$13.5B

9.1

AXP

American Express Company

151,610,700

$11.2B

7.6

(Source: “Form 13F,” U.S. Securities and Exchange Commission, last accessed February 16, 2017.)

What you can tell from this list is that Buffett likes “easy money.” He doesn’t want to gamble his money (and his investors’ money) on stocks that could break in either direction. He likes a sure thing.

Based on his comments about Amazon and Jeff Bezos, he clearly thinks that Amazon stock is easy money.

Conclusion: Buffett Is More Bullish on Tech Than He Admits

Buffett likes to compare Amazon to FedEx Corporation (NYSE:FDX), which is obviously not a technology company. The similarity was that both Amazon and FedEx didn’t invent anything new; they just took ideas that already existed and arranged them in a unique way.

For FedEx, that meant aircrafts and distribution centers. For Amazon, it means getting products to customers faster and at lower prices than they’d find anywhere else. I know the concept sounds simple, but it’s incredibly hard to execute. Buffett knows this. He appreciates it.

I don’t know whether he has evolved, or if tech stocks have matured. But the fact is that Warren Buffett—the Warren Buffett—is expressing strong bullish sentiments about Amazon stock.

He has dumped $900.0 million worth of WMT stock, and for good reason. There’s no sense in betting on a lame horse. Walmart stock is going to be hampered by industry trends going forward, so pulling out now was a smart move for the “Oracle of Omaha.” If only he had gotten out sooner, he could have saved a little more money.

The legendary investor now has an opportunity to invest in Amazon stock. IBM was the earliest sign that he’s warming to tech stocks. Considering how lackluster the rest of the stock market looks, Buffett may as well grit his teeth and redirect those funds into AMZN stock.

It’s time he embraced the future.