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Fundsmith has been buying Amazon shares… and so have I

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US regulatory filings show that investment house Fundsmith recently bought Amazon (NASDAQ: AMZN) shares. To be clear, the shares weren’t bought for the flagship fund, Fundsmith Equity. Instead, they were purchased for Fundsmith Investment Services, set up to manage fund manager Terry Smith’s own money.

I’m not surprised by this purchase (despite the fact Smith has been critical of Amazon’s business model in the past). In my view, Amazon is a ‘must-own’ stock and I’ve been buying the stock too in recent months. As a result, it’s now one of my largest holdings.

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Here’s a look at three reasons I’m buying Amazon shares.

Why I’m buying Amazon shares

The first reason I’m bullish on the stock is that I believe the group’s e-commerce division has a huge growth runway ahead of it. While the online shopping industry has experienced strong growth in recent years, I think there’s plenty of growth to come. According to Vision Research, the global e-commerce market is expected to grow from $3.7trn in 2020 to $8.7trn by 2030. Amazon should benefit from this growth.

What strikes me about Amazon is that its market share in the UK and Europe is still quite low (well below what it is in the US). Given Amazon’s dominance and economies of scale, I think it will be able to capture significant market share in these regions in the years ahead.

High growth potential

The second reason I’m excited about Amazon is the potential growth in the company’s cloud computing division, AWS. The cloud computing market looks set to experience strong growth in the years ahead as businesses go digital.

Between now and 2030, the market’s expected to grow by nearly 20% per year. Currently, Amazon has a 40%+ market share of the cloud industry, so I expect its related revenues to rise significantly going forward. Recent Q2 results showed 37% growth in this division.

Attractive share price set-up

Finally, I think the share price set up and the valuation are attractive. After a big run last year, Amazon shares have been consolidating this year. I see this as very healthy as the shares have now built a solid base around the $3,000-$3,500 level from which they can move higher in the long run.

As for Amazon’s valuation, it’s high (forward-looking P/E of 65). However, I don’t think it’s outrageous given the company’s dominance in two high-growth industries.

Risks

Of course, there are risks to the investment case. One thing to consider with Amazon is that it can be a very volatile stock at times. In the past, it’s regularly had pullbacks of 20%+. It could easily fall 20-30% again if we see a high level of stock market volatility.

Another issue is regulatory uncertainty. Given Amazon’s dominance, regulators are keeping a close eye on the company. Recently, the company has been investigated by the UK’s Competition and Markets Authority.

I’m bullish on Amazon shares

Overall however, I see the long-term risk/reward proposition here as attractive at the current share price. I’m bullish on the shares and I think it’s very encouraging that Fundsmith has been buying recently.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares of Amazon and has a position in Fundsmith Equity. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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