Investors are always looking for the next big idea that could become the next Amazon (NASDAQ: AMZN). While this endeavor could be rewarding (assuming we can find the right company), it is tough to do because each successful company is unique. So, these future leaders will likely emerge from the most unexpected places.
An easier way is to bet on the existing winner to keep winning over the long term. And yes, investors can consider Amazon itself rather than the next Amazon.
Amazon has a diversified income stream
Amazon has been one of the greatest success stories of the last two decades. It started as a small online bookstore but went on to dominate the e-commerce industry by selling almost everything on its flagship platform.
It continuously added new product categories and services to delight its customers. It even invited its competitors by setting up Amazon Marketplace, allowing third-party sellers to sell on its platform. This move significantly expanded the product selection, giving customers good reasons to return for more. Amazon Prime is another example of the company’s ability to introduce new services to delight its customers, enhance customer loyalty, and ultimately sustain its ecosystem’s growth.
As Amazon grew its retail business, it quietly launched its cloud computing business, Amazon Web Services (AWS), to expand into the commercial sector. As the first mover, AWS quickly became the preferred service provider for companies to leverage cloud computing for expansion. As these customers scaled their businesses, AWS was well positioned to grow with them.
Amazon’s relentless focus on innovation and experimentation over the decades led to a diversified and robust business model that offers stability and opportunity. Out of the $143 billion revenue in the third quarter of 2023, 44% came from Amazon’s first-party sales, 24% from third-party seller fees, 16% from AWS, 7% from subscription fees, 8% from advertising services, and the remaining from other services.
With so many revenue streams, Amazon can weather temporary challenges associated with economic downturns, industry-specific challenges, or geopolitical uncertainties. If one segment faces difficulties, the remaining segments can cushion the shock, reducing the overall volatility in the company’s financial performance. Better still, such a business model offers ample opportunity for Amazon to reinvest for future growth.
The elephant can still dance
Amazon has been one of the most successful growth stocks over the last two decades, growing revenue from just $511,000 in 1995 to $514 billion in 2022. While Amazon’s already gigantic size means it is unlikely to grow at its historical rate, it still has good growth prospects in the coming years.
Take e-commerce, for example. While Amazon is the clear leader in the U.S., with around 38% of the e-commerce market share, its overall retail share remains low because e-commerce penetration is just about 15% of total retail sales. Beyond that, Amazon can grow in emerging markets like India.
Similarly, the cloud computing industry has promising growth prospects thanks to the ongoing migration to the cloud and the rapid development of artificial intelligence (AI) technologies. AWS’s leading market share positions the company well to capitalize on any pent-up demand for existing storage and computing services while launching new features and products as new technologies emerge.
Another critical factor investors should note is that Amazon’s culture of experimenting with new ideas, products, and service innovations, as well as its focus on customer delight, provides the right platform for the company to sustain its growth momentum. With such a culture in place, the tech company is set to keep up with the latest trends, giving it access to future growth opportunities.
All said, I think the tech giant can still grow for a while.
Betting on the winner
Amazon has been one of the biggest wealth-generation machines for over two decades. It first dominated the e-commerce sector and later became a leader in other areas, such as cloud computing.
To invest in Amazon for the next five years is to bet on the company’s ability to sustain its leadership in e-commerce while expanding in other areas, like cloud computing and AI. I think it has a good chance of achieving that.
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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. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
1 Stock to Buy and Hold for the Next 5 Years in 2024 was originally published by The Motley Fool