Greg Abel Just Sold 2.3 Million Shares of Amazon Stock. Here's Why That Could Be a Huge Mistake.

It's the Greg Abel era at Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB). The new CEO is making his mark on the high-profile holding company, reshuffling the stock portfolio and acquiring new companies to add to the company's about 200 subsidiaries. Berkshire just closed on the acquisition of homebuilder Taylor Morrison for $6.8 billion in a bet on a housing rebound coming up soon.

He also closed out 16 of the portfolio's smallest stock positions, including Amazon (NASDAQ: AMZN). Berkshire bought Amazon stock in 2019, just before the COVID-19 pandemic, when e-commerce became a lifeline for global consumers, and before the artificial intelligence (AI) revolution turned its cloud business, Amazon Web Services (AWS), into a powerhouse in its own right. Former CEO and investing legend Warren Buffett had said, "I was too dumb to realize what was going to happen," but one of the company's investing managers eventually made the purchase.

Image source: Amazon.

Abel sold all of Berkshire's 2.3 million Amazon shares in his first quarter as CEO. It had been only a small fraction of the portfolio, accounting for less than 1% of the total most of the time. Here's why Berkshire might be making the same mistake of underestimating Amazon again.

Capitalizing on the shift to the cloud

Amazon has reinvented itself many times while holding onto its "day one" mission of acting like a start-up. It launched AWS in 2006 under the leadership of Andy Jassy, who is now CEO of the whole company. His inside-out knowledge of AWS puts him in a prime position to lead the company forward as AI explodes.

Jassy has maintained over the past few years that the opportunity is enormous and life-changing, and that the shift to the cloud will happen. He has justified Amazon's massive AI spend by explaining how it will only be able to monetize the opportunity if it's prepared for it, but the market has been concerned about whether the results will warrant what seem like excessively high costs.

However, the results are coming in, and they're looking good. Amazon's revenue increased 20% year over year in the second quarter, driven by a 37% increase in AWS sales. That's a significant acceleration from recent quarters. Operating income increased 63%, driving total operating income growth of 44%, and it accounted for more than 60% of the total.

Here's how the quarter looked compared to recent performance.

Data source: Amazon quarterly reports. Growth is year over year.

The market is finally catching on to Amazon's opportunity

The AWS cloud business is being driven by hyper-interest in AI and engagement with its AI development platforms. It offers a vast array of tools and services through Bedrock and owns an AI chip business with a $25 billion run rate. AWS has a $169 billion run rate, which would make it the 24th-largest business by sales in the U.S. if it were a stand-alone business.

The market picked up on Jassy's future predictions, which are confident and compelling. Even at its current rate of build-out, which will require $220 billion in 2026, Amazon still doesn't have enough capacity to meet demand, and Jassy expects this in 2027, too. The company already has "striking" demand into 2028, and Jassy believes AWS alone will eventually become a $1 trillion business, "with very appealing accompanying free cash flow and return on invested capital."

Amazon stock jumped 26% after the report, and it's still rising as of this writing. It's up 43% from the middle of the first quarter, an average guess for when Abel might have sold it.

A number of Wall Street analysts raised their 12- to 18-month price target on Amazon stock after the report, and the long-term outlook is finally starting to look realistic to investors.

Not too long after Buffett made his comment about missing Amazon, he said, "I've watched Amazon from the start, and I think what Jeff Bezos has done is something close to a miracle. And the problem is, if I think something will be a miracle, I tend not to bet on it." That could be sound investing advice, but anyone betting against another Amazon miracle might be missing out.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.