Headquartered in Seattle, Amazon.com, Inc (Nasdaq: AMZN) is one of the largest companies in the world, trading with a market cap in excess of $1.6 trillion. It’s one of the most popular stocks on the stock market. However, last year wasn’t a great year for the stock or its investors, as Amazon underperformed the overall market.
Some argue that last year’s lackluster performance is a sign that the stock has the potential to soar in the market this year, bringing us to the million-dollar question…
Should You Buy Amazon Stock?
There’s no question that AMZN stock is one of the darlings of Wall Street. It’s one of the top stocks included in exchange-traded funds (ETFs), being featured in 325 different funds according to ETF.com. Also, looking at analyst ratings tells you it’s one of the top stocks on the market.
From a 10,000-foot overview, Amazon looks like a solid buy, but what happens when we dig deeper into the details? Should you consider buying a slice or two of Amazon today?
Historically, except for the hiccup caused by COVID-related supply chain disruptions, Amazon has been an incredible stock to own. If you had bought $10,000 of the stock back in 1997 when its share price was just $1.73, you’d have around $18 million as of January 2022.
More recent returns have been pretty impressive as well. The stock price is up more than 289% over the past five years, which compares nicely to the approximately 103% returns experienced by the S&P 500 during the same period.
Sure, the stock has seen its fair share of peaks and valleys throughout its history, but when looking at the stock over a period of five years or longer, its historic performance is clear. Amazon is a stock known for producing compelling long-run returns.
Amazon.com has become a household name, but saying so doesn’t fully capture just how important the company has become to the United States economy. The company isn’t just an e-commerce powerhouse, it’s the go-to option for consumers who shop online. According to Statista, the company controls 41% of the U.S. e-commerce market, with its closest competitor being Walmart with only 6.6% of the market.
The only word that accurately describes the company’s stature in the e-commerce industry is dominance!
The global pandemic, as horrible as it has been and continues to be for many consumers, has been a double-edged sword for Amazon.
Consumers are more likely to shop online today than ever before, helping to expand the company’s already massive audience. On the other hand, COVID-19 has caused significant pain for the company, with supply chain issues and labor shortages leading to a less-than-exciting 2021 performance.
Nonetheless, in the long run, there’s quite a bit to look forward to when it comes to the online shopping giant.
Supply chain issues aren’t expected to last forever, and Amazon’s sales are likely to increase dramatically when they pass, leading to impressive revenue and earnings growth. Moreover, it’s not just about e-commerce at Amazon.
It’s Not All About E-commerce
Amazon founder Jeff Bezos tackled the e-commerce market with unmatched success, and while that’s the focus of most conversations surrounding Amazon stock, it’s worth giving some attention to the company’s activities outside of its online retail platform.
The company isn’t just an e-commerce giant.
Recently, Amazon has been making strides toward creating a brick-and-mortar presence in order to tap into the audience that simply doesn’t care for shopping online. In 2017, the company acquired Whole Foods Market, and in recent years, it has been testing the launch of physical stores in densely populated areas.
One of the most promising aspects of the company is its cloud computing product known as Amazon Web Services (AWS). According to Statista, Amazon leads the cloud computing market with a healthy 32% market share, its closest competitor being Microsoft’s Azure with a 20% market share.
There’s strong potential for AWS to become the real revenue growth story for Amazon, and looking at recent quarters, it’s been the unsung hero for quite some time. In the four quarters of 2020, AWS revenue grew by 33%, 29%, 29%, and 28%, respectively. And 2021 proved to be even more impressive with the first three quarters’ revenue growth in the segment adding another 32%, 37%, and 39%, respectively.
Already, the cloud computing arm of the company represents almost 15% of its overall revenue. That’s great news for multiple reasons:
- High Margins. Amazon.com’s e-commerce marketplace is huge, but it is built around a less-is-more, relatively low margin business model. AWS margins are much higher than the company generates from sales on its e-commerce platform. As AWS continues to grow, contributing to a larger percentage of overall revenue, margin growth should follow.
- Cloud Computing Growth. The cloud computing industry is expected to grow rapidly ahead. As artificial intelligence becomes part of day-to-day life, connected devices and the algorithms that keep them alive will continue to rely heavily on cloud computing capabilities. As an early leader in the industry, the company is on the path to long-term dominance in this industry too.
- Diversification. Diversification is a commonly-preached topic in the stock market, and for some time, Amazon.com was a pure-play stock. By successfully entering the cloud computing market, Amazon has diversified its portfolio in a big way, which likely helped maintain stability in the face of COVID-related supply chain and labor force issues.
What Analysts Think About Amazon Stock
If you think the picture painted above may be a bit too rosy when it comes to the future of Amazon stock, just take a look at analyst ratings for validation. According to TipRanks, analysts see Amazon as one of the best stocks on the market.
At the moment, there are 30 analysts weighing in on the stock, with not a single Sell or Hold rating. That’s right, all 30 analysts rate the stock a Buy. The price targets are equally impressive, with a low of $3,800, a high of $4,700, and an average of $4,144.17. That price target suggests that the stock could climb more than 30% over the next year.
The Long-Term Picture
In the long run, all signs seem to suggest investors should gobble up Amazon. Not only has the company maintained its leadership position in its core e-commerce business, it’s emerging as a leader in the bustling cloud computing industry.
With a long history of strong performance and a seemingly bright future ahead, the stock is likely to continue to outpace the overall market in terms of long-term growth.
Keep in mind that this is the long-term picture, and nobody knows the future. On the short-term side of the coin, Amazon is a stock that trades with quite a bit of volatility, frequently experiencing peaks and valleys. So, if you’re looking for an investment that’s safe as a short-term play, you may want to look elsewhere.
Who Should Buy Amazon Stock?
The short answer is that just about anyone with a long-term investment portfolio could benefit from ownership of Amazon.com stock.
However, the amount of the stock you should have in your portfolio will vary from one investor to the next. Here are a few factors to consider when deciding whether to include Amazon in your portfolio and how much to invest:
- There’s No Dividend. Amazon.com doesn’t currently pay a dividend, and there’s no expectation that this will change anytime soon. If you’re interested in generating income from your investment portfolio, you’ll want to keep your allocation to the stock to a minimum.
- Tech Stock Through and Through. Amazon.com is an e-commerce stock as well as a cloud-computing stock, but above all, it’s a tech stock and behaves as such. As a result, the best candidates for larger positions in AMZN are those with an affinity for technology.
- Volatility. Generally sitting with the growth stocks, AMZN is known for relatively fast-paced movement, meaning that volatility is relatively high. As a result, it’s best suited for tech lovers with a stomach for short-term risk. If you’re a risk-averse investor, you may want to keep your Amazon allocation to a minimum.
- Expensive. Amazon shares are perpetually expensive, with a single share costing well over $3,000 in early 2022. If your brokerage offers fractional shares, slices of Amazon stock can fit nicely into your portfolio, but buying whole shares can be impractical for investors with smaller portfolios.
Amazon clearly looks to be a solid investment over the long term. Its dominance in e-commerce and cloud computing speaks for itself, and its future prospects are exciting to say the least. By all accounts, including my own, the stock is poised for a recovery from last year’s lackluster performance.
However, it’s important to keep in mind that nobody can tell the future.
Sure, Amazon may be primed for a comeback in my view — and the view of every analyst that covers it — but that doesn’t mean a dramatic recovery is going to take place. As an investor, it’s ultimately up to you to make decisions that will either result in the growth or loss of your money.
With that said, don’t take my word for it, take the time to do your own research and form your own opinion!