Your life is dominated by Amazon. Even if you don’t order off the web store, you might watch the shows on its streaming service Amazon Prime, or listen to audiobooks using its Audible service. Or maybe you use Netflix, Linkedin or Slack, which all run on Amazon’s AWS platform. Either way, you can’t get through a day without using an Amazon service.
Should the same be true of your stock portfolio?
So far, it would have been a good strategy. A $1,000 investment in Amazon at the beginning of 2010 would be worth over $23,000 today. To compare, an investment in the S&P 500 index for the same time would return a little less than $3,000.
But past performance is no indicator of future success. So let’s break down how Amazon works.
A long-term investment in Amazon is, at its core, a bet that one of the world’s largest companies can continue to dominate the market segments it's active in, as well as expand into new ones.
For Amazon, that means looking at both existing business and possible new ventures. The online shopping portion of the business is obviously dominant, and has only become more so since the coronavirus pandemic, as people moved their shopping habits online.
But the retail business doesn’t actually produce most of the profit for Amazon. That honour goes to the less-understood Amazon Web Services division. It rents out server space and power to people and companies, allowing them to do everything from hosting websites to running all of Netflix (yes, Netflix runs on AWS.) Amazon was an early entrant into the cloud computing space, and the division now accounts for more than half of all profit.
In order to keep succeeding, Amazon would need to fend off fierce competition on the retail side from the likes of Walmart and eBay, but also on the cloud side from companies like IBM and Microsoft’s Azure platform.
Then there’s the businesses Amazon hasn’t gotten into yet. With its size and huge platform, it could easily enter a market and dominate it through sheer size and buying power. Investors have been speculating about possible industries for Amazon to disrupt for years.
Three years ago, the answer seemed to be clear, when the company announced it was going to start a healthcare joint venture with Warren Buffett’s Berkshire Hathaway and investment bank JPMorgan Chase. The day it was announced healthcare stocks in the U.S. dropped as investors speculated they were about to get pushed aside by Amazon’s heft.
But the venture never really went anywhere, and was shut down in January 2021. It goes to show that dominating in one or even a few industries doesn’t guarantee success. Keep that in mind when you’re making your decision.
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