The Best Warren Buffett Stock to Buy With $500 Right Now

Warren Buffett has been selling stocks and stockpiling cash. But for the most part, he's leaving the Berkshire Hathaway portfolio intact. He's holding onto his favorites, even though he sold a large portion of Apple, and the portfolio is still dominated by financial stocks and dividend stocks.

Amazon (NASDAQ: AMZN) is one of Buffett's smaller positions, and it wasn't his idea to buy it -- he said that one of Berkshire Hathaway's portfolio managers decided to buy it. It's been a valuable addition, up 127% over the past five years, which was around the time Buffett bought it.

Since performing a high-profile 20-for-1 stock split two years ago, Amazon's stock price has been in the low triple digits. If you have $500 available to spend on investments today, a couple of shares of Amazon stock is an excellent choice.

Why did Buffett buy it?

It may not have been Buffett's idea to buy it, and it doesn't exactly fit his classic framework. However, he allowed the trade, and he has said he made a mistake by not buying earlier. When asked why he didn't own it earlier, he said, "I don't have a good answer," and "It's one I missed big time." He also claimed to not "understand the power of the model."

That was already 20 years after Amazon went public, and it took another two years for Buffett to make the move. Buffett is not a big proponent of tech stocks, and he only buys a stock if he thinks it's a good value. By the time Buffett bought Amazon stock, it was already a lot more than a tech stock, more firmly in the consumer goods and retail camp. Amazon and Apple are the two stocks in Buffett's portfolio that are most closely identifiable as tech stocks, but both of them are thriving consumer goods businesses with a strong edge over competitors, and that's more up Buffett's alley.

Buffett recently reiterated his approach to buying wonderful businesses at fair prices and not the opposite; so while investors often think of Buffett's approach as looking for bargains, his interest is more in finding great businesses that are undervalued as opposed to cheap. And undervalued could come in different forms.

Today, Amazon stock is cheaper than ever, trading at a P/E ratio of 43. Objectively, that's still not cheap. But compared with recent historical averages and in the broader picture of its performance and opportunities, that's not a rich valuation.

Why you should buy it today

Despite already rewarding shareholders with some of the highest gains on the stock market in the past, Amazon is poised to keep growing and continue rewarding investors. The gains may not look the same as they did for early investors, but they come with less risk than they used to.

The major growth driver today is in generative artificial intelligence (AI). Amazon uses AI throughout its enterprise, from determining the fastest and cheapest delivery routes in e-commerce to pinpointing target audiences for advertisers. However, the generative AI platform it offers its Amazon Web Services (AWS) cloud computing clients is turning out to be a massive business, and it's just getting started.

Management said it launched twice as many services as all of its competitors combined over the past 18 months, and the AI business is already bringing in billions of dollars. The consequences are far-reaching; AWS growth has decelerated, but they're speeding up now as customers realize they can't access the power of Amazon's generative AI without being on the cloud. AWS sales increased 19% year over year in the third quarter. On top of that, AWS is a capital-light business, and it's highly profitable, accounting for more than 60% of total operating income in the quarter.

There's massive potential here, and it's just one part of the Amazon growth machine. Amazon still has a major lead in e-commerce, and it keeps innovating to keep that lead, and it's an active part of the streaming wars. Advertising is its other high-growth business, also up 19% over last year in the third quarter, and it's still unlocking value in offering advertisers more exposure through its new ad-supported streaming tier.

Investors shouldn't unthinkingly follow Buffett, or any other billionaire money manager, into Amazon or any other stock. However, Amazon is a top stock with robust opportunities trading at an attractive valuation, and if you have $500 available today, Amazon is an excellent choice.

Should you invest $1,000 in Amazon right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Amazon, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.