Most stock buyers already know it Amazon(NASDAQ: AMZN) has been one of the most rewarding investments of modern times. Its shares have risen 275,000% since the company’s initial public offering in 1997, reflecting its grip on an e-commerce market that has since exploded.
As the adage goes, past performance is no guarantee of future results. Online shopping cannot be revived. As such, Amazon stock is unlikely to repeat this performance for at least 27 years.
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Still, this mega-company will likely remain a rewarding ticker for the foreseeable future and groom newcomers for life. It is only possible to do this for a different reason than in the past.
They say timing is everything. Amazon has proven that this claim may be true.
Amazon launched as an online bookstore in 1995, when the Internet was still virtually brand new. The rest, as they say, is history. The company quickly expanded its offerings, on its way to current annual revenues of $620 billion.
It’s clearly still in the e-commerce sector. Market research firm eMarketer reports that Amazon alone accounts for about 40% of online spending in the US. It’s also doing quite well abroad, even though foreign competitors have a home-field advantage over the U.S.-based company. It also launched a cloud computing venture in the meantime, leveraging its established name. Amazon Web Services generates about 60% of the company’s operating revenue, even though it only represents less than 30% of Amazon’s revenue.
Then there’s Amazon Prime, which offers subscribers access to a massive library of streaming video and free next-day shipping on millions of items ordered online. Now the company is waist deep in the digital advertising business, monetizing all web traffic on Amazon.com. Over the past four quarters, the company has collected over $53 billion in advertising revenue… a number that continues to grow.
Data source: Amazon Inc. Chart by author. The figures are in billions.
That’s not to suggest that each venture that Amazon has embarked on has turned out to be a winner. After years of mediocre results, it closed all its bookstores (which also sold many other merchandise) in early 2022. The move to its own grocery and grocery delivery company has also not become a major profit center, despite the fact that it has now grown to 52 locations. and run. In retrospect, the 2017 acquisition of Whole Foods Market was arguably a more meaningful – albeit more expensive – move in this area. And just last month, the company shuttered a same-day delivery service called Amazon Today that transported goods from brick-and-mortar stores to nearby customers.
Still, more than enough of what Amazon has tried seems to be working.
But what about all this makes Amazon the kind of stock that will last a lifetime? None of it in itself. However, there are two important principles all of the above.
First, Amazon operates a vast digital ecosystem of regular customers.
While the company itself doesn’t divulge details all that often, Consumer Intelligence Research Partners’ latest report on the matter suggests there are more than 200 million paying Prime members worldwide. Most of them live in the US, although the company is gaining traction with the service as it introduces it abroad.
This is not a trivial detail. Not just TV ratings agency Nielsen indicate that Prime content is viewed more than Disney‘s and Warner Bros. Discovery‘s Max (just to name a few) in the United States, Consumer Intelligence Research Partners data shows that Prime members spend almost twice as much on Amazon.com as non-Prime members. They also do this more consistently.
Since many Prime customers are now in the habit of buying from Amazon for convenience, these revenues are likely to continue. Member-generated revenue is likely to grow as the company expands its international footprint, enhancing the benefits of membership. More than 90% of subscribers who stick with it for at least a year sign up for another year of service. After the second year, retention improves even more.
The other takeaway that Amazon stock could help set you up for life if you don’t already own it? It’s clearly willing to try new things, but it’s just as willing to pull the plug on experimental companies when it becomes clear that it won’t work.
Founder Jeff Bezos gets much of the credit for this company ethos. Current and former Amazon employees say the driven former CEO fostered a “fail fast, fail often” culture. While the company has abandoned more projects than it has kept alive, its willingness to proverbially cut the bait offers the freedom to create ventures that could work out. For example, if Amazon was afraid of failing on this front, it might never have gotten into the cloud computing race that Synergy Research Group says it now leads.
Current CEO Andy Jassy has put his own fingerprints on this thinking since taking the helm in 2021, pulling the plug on once-hopeful initiatives like Amazon Today and the company’s Just Walk Out cashierless shopping technology from its own Amazon Fresh stores (even as it wants to sell this technology to other retailers). He’s still a fan of the net benefits of being willing to fail in the name of finding success. Look for more successful, growth-oriented experiments for the indefinite future.
The kicker: Although the e-commerce industry has grown since the 1990s, the US Census Bureau says that currently only about 16% of the country’s retail spending is done online. A significant portion of the remaining 84% remains up for grabs for any company well positioned to win. That’s clearly Amazon.
Again, it’s unlikely that Amazon stock will ever again post the kind of gains it made during the days when it was a newcomer and a full-fledged powerhouse. Keep your expectations in check.
However, even achieving a fraction of the performance between 1997 and 2024 would still be an incredible feat, making newcomers very wealthy. There are certainly still plenty of opportunities to realize that growth.
Long-term investors should not be too intimidated by this year’s extreme bullishness.
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*Stock Advisor returns November 25, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has positions in Warner Bros. Discovery. The Motley Fool holds positions in and recommends Amazon, Walt Disney and Warner Bros. Discovery on. The Motley Fool has a disclosure policy.
Can Buying From Amazon Today Set You Up for Life? was originally published by The Motley Fool
