Amazon (AMZN -1.30%) started out in the 1990s selling books online. Over the next three decades, it transformed into an internet juggernaut that offers virtually everything under the sun. The business has its hands in other tech-forward areas as well.
In the last 20 years, this “Magnificent Seven” stock has generated a monster 10,310% return, turning a $1,000 investment into $104,000. But thanks to extreme levels of volatility that have recently rocked the market, shares trade 26% below their February peak (as of April 11). It’s time to take a closer look at the business.
Should you buy Amazon stock now and hold for the next 20 years?
Financial success
Jeff Bezos, Amazon’s billionaire founder, always wanted the company to prioritize the customer above anything else. That focus on better serving users and adding value for them has resulted in unbelievable success for Amazon, particularly as it relates to growth.
In the past decade, revenue surged 617%. Last year, the business raked in a jaw-dropping $638 billion in net sales. Amazon is projected to increase the top line at a compound annual rate of 9.7% over the next three years, according to Wall Street consensus analyst estimates. This is a healthy outlook for a massive enterprise.
It’s not hard to be optimistic about the company’s growth trajectory. Amazon operates with multiple tailwinds working to its benefit. It’s exposed to cloud computing, online shopping, streaming entertainment, and digital advertising. And based on recent trends, these markets will all be larger 20 years from now.
Investors will appreciate Amazon’s emphasis on cost controls and organizational efficiencies. The bottom line is rapidly rising. Operating income increased 462% in the past two years, as Amazon showcases just how profitable it can be. Over time, as revenue continues to grow, and the leadership team runs the business with ongoing discipline, earnings are set to be much higher.
Amazon’s dominant position
Amazon is a dominant company that has developed durable competitive strengths, creating an economic moat. Its huge scale is one factor that allows it to invest heavily in its supply chain, leading to cost advantages thanks to the sheer volume of merchandise Amazon ships.
What’s more, the online marketplace has a network effect. With more shoppers going to the site to buy items, setting up a storefront becomes more enticing for merchants because there is a larger customer base. This creates a positive feedback loop.
We also can’t ignore Amazon Web Services, the industry-leading cloud computing platform. It also benefits from a cost advantage, as it’s better able to leverage fixed costs that result in strong profitability. Customers likely deal with switching costs. And this segment also has a technical edge, especially in terms of the vast amount of data it can collect that can help support the introduction of artificial intelligence tools.
However, investors should also keep some important risks in mind. Amazon’s dominance will continue to draw the attention of regulators. It faces tremendous competition in all areas of the business, requiring it to continuously innovate to better serve customers. Given its massive workforce, maintaining good labor relations is critical. Of course, macroeconomic challenges, like the evolving tariff situation, can’t be ignored.
Buy the dip
Without question, Amazon has become one of the most successful companies in the world. And investors can buy the stock right now on the dip. It trades at a price-to-sales ratio of 3, below the trailing five- and 10-year averages.
It’s important to understand that it’s difficult to look 20 years out, as the world is unpredictable. But Amazon is a high-quality business whose shares carry a reasonable valuation. It’s worth considering buying today.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
