Most stock buyers already know Amazon(NASDAQ: AMZN) has been one of the most rewarding investments of the modern era. Shares are up a market-leading 275,000% since the company’s 1997 public offering, reflecting its hold on an e-commerce market that’s exploded in the meantime.
As the adage goes, past performance is no guarantee of future results. The online shopping business can’t come into existence again. As such, Amazon stock isn’t likely to repeat the feat over the coming 27 years.
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Still, this mega-company is likely to remain a rewarding ticker for the foreseeable future, setting newcomers up for life. It’s just apt to do so for a different reason than it did in the past.
They say timing is everything. Amazon proved that this claim may well be true.
Amazon launched as an online bookstore in 1995 when the internet was practically brand new. The rest, as they say, is history. The company soon expanded its offerings, en route to its current yearly revenue of $620 billion.
It’s obviously still in the e-commerce business. Indeed, market research outfit eMarketer reports that Amazon alone accounts for about 40% of U.S. online spending. It’s doing pretty well overseas too, 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 well-established name. Amazon Web Services generates about 60% of the outfit’s operating income, even though it only accounts for less than 30% of Amazon’s revenue.
Then there’s Amazon Prime, offering subscribers access to a huge library of streaming video and free next-day shipping on millions of items ordered online. Now the company’s even waist-deep into the digital advertising business, monetizing all the web traffic at Amazon.com. Over the past four quarters, the company’s collected more than $53 billion in ad revenue … a number that’s still growing.
Data source: Amazon Inc. Chart by author. Figures are in billions.
That’s not to suggest that every venture Amazon has entered into has turned out a winner. After years of lackluster results, it shuttered all its bookstores (which also carried plenty of other merchandise) in early 2022. Its foray into its own grocery and grocery-delivery business also hasn’t become a major profit center, despite 52 locales now up and running. In retrospect, its 2017 acquisition of Whole Foods Market has arguably been a more meaningful — albeit more expensive — move in this space. And just last month, the company shut down a same-day delivery service called Amazon Today that ferried 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 any of this makes Amazon the sort of stock that can set you up for life? None of it in and of itself. There are two key takeaways, however, rooted in all of the above.
First, Amazon manages a massive digital ecosystem of regular customers.
While the company itself doesn’t divulge too many details very often, Consumer Intelligence Research Partners’ most recent report on the matter suggests there are over 200 million paying Prime members worldwide. Most of them reside within the U.S., although the company’s finding traction with the service as it unveils it overseas.
This is no trivial detail. Not only does TV-ratings agency Nielsen indicate Prime’s content is more watched than Disney‘s and Warner Bros. Discovery‘s Max (just to name a few) within the United States, Consumer Intelligence Research Partners’ data suggests Prime members spend almost twice as much at Amazon.com as non-Prime members do. They also do so more consistently.
Given that many Prime customers are now in the habit of purchasing from Amazon due to its convenience, this revenue is likely here to stay. The member-driven revenue is likely to grow as the company expands its international footprint, in fact, bolstering the benefit of being a member. Well over 90% of subscribers who stick with it for at least one year sign up for another year of service. After the second year, retention improve even more.
The other takeaway that could help Amazon stock set you up for life if you don’t own it yet? It’s clearly willing to try new things, yet is just as willing to pull the plug on experimental businesses when it becomes clear they’re not going to work out.
Founder Jeff Bezos gets much of the credit for this corporate ethos. Current and former Amazon employees say the hard-driving former CEO fostered a “fail fast, fail often” culture. Although the company’s abandoned more projects than it’s maintained, a willingness to proverbially cut bait offers the freedom to launch ventures that just might work. For instance, if Amazon was afraid to fail on this front, it might have never 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 way of thinking since taking the helm in 2021, pulling the plug on once-hopeful efforts like Amazon Today and the company’s Just Walk Out cashierless-store technology from its own Amazon Fresh stores (even as it aims to sell this tech 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-minded experimenting for the indefinite future.
The kicker: As much as the e-commerce industry has grown since the 1990s, the U.S. Census Bureau says only about 16% of the country’s retail spending is currently done online. A sizable chunk of the other 84% remains up for grabs by any company that’s in a good position to win it. That’s clearly Amazon.
Again, it’s unlikely Amazon stock will ever again dish out the kinds of gains it did between the points in time when it was an up-and-comer and a full-blown powerhouse. Keep your expectations in check.
Even achieving a fraction of its performance between 1997 and 2024, however, would still be an incredible run, making newcomers very rich as a result. There’s certainly still plenty of opportunity to produce that growth.
Long-term investors need not be too intimidated by this year’s extreme bullishness too much either, by the way.
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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. James Brumley has positions in Warner Bros. Discovery. The Motley Fool has positions in and recommends Amazon, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
