Over the past 12 months, shares of Amazon.com (AMZN) are up more than 100%. For most investors, a move like that would signal AMZN stock is overvalued and due for a slowdown or pullback while company metrics catch up.
On the surface this sounds logical, but following that thought process may be a big mistake for long-term buy-and-hold investors.
AMZN stock is up more than 1,250% over the past ten years, (compared to a 63% gain by the S&P 500). The main arguments for not buying shares of AMZN today are obliviously past growth, as well as questions about how long that can continue and current valuation based on the fact that AMZN doesn’t regularly post positive earnings.
But these arguments have been made for years by AMZN bears, and each of the last ten years, the stock has proven those naysayers wrong … costing those who have listened to this advice massive, market-beating gains.
But moving forward, it’s not understanding AMZN’s past that makes AMZN stock a buy today — it’s understanding what makes AMZN one of the greatest growth stocks you can buy today.
Why Amazon Stock Is a Perfect Source of Growth
First, Amazon’s leadership is a big part of past and future success. Jeff Bezos doesn’t let the critics of his company’s profitability and how much Amazon spends affect the way he operates. Continuing to invest heavily in the future of the business is what has brought Amazon to where it is today and helped it build massive barriers against competition.
Bezos has given us no reason to believe management will change their business investment tactics anytime soon, meaning long-term investments in the company’s operations should continue, which will help fuel even more growth down the road.
The next reason is the number of revenue streams Amazon is building. Currently, AMZN has four business segments: Electronics and other general merchandise ($17.7 billion in the third quarter), Media ($5.2 billion), Amazon Web Services (AWS) ($2 billion) and other ($249 million).
While general merchandise represents the bulk of revenue, other rapidly growing units (such as AWS, with 78% growth in Q3) help make Amazon less vulnerable if the general merchandise unit were to begin to dramatically slow down in terms of revenue growth.
AWS Is a Star for AMZN Stock
Something else that makes AWS so important for Amazon stock’s future growth is the unit’s operating income margin compared to the other divisions.
Besides breaking out net sales by the four units mentioned above, AMZN breaks out net sales into three reportable segments: North American, International and AWS. During the third quarter, the North American segment posted net sales of $15 billion with operating expenses of $14.48 billion and operating income of $528 million, or an operating margin of 3.5%.
The international segment posted net sales of $8.27 billion, expenses of $8.32 billion and an operating income loss of $56 million, or an operating margin of -0.6%.
Lastly, Amazon’s AWS unit posted net sales of $2.09 billion for the quarter, operating expenses of $1.56 billion and operating income of $521 million, or operating income margin of 24.9%.
So while AWS is 86% smaller in terms of revenue as compared to the North American segment, it’s nearly as profitable on an operating income basis, and wildly more profitable from a margin standpoint.
Lastly, as Amazon continues to infiltrate customer’s lives, it increases its own business’s long-term staying power. Perfect examples are the Kindle, Amazon Prime and Amazon’s Echo device.
Sell a Kindle and offer the books for it in an exclusive format, which makes a customer less likely to switch to a new e-reader platform down the road. Prime offers movies, TV shows and other services, and free shipping, which helps keep customers shopping on Amazon.com. Echo’s auto-order feature further deepens switching cost as customers grow accustomed to the ease of the service.
The three examples above are just a few reasons AMZN stock is one of the best growth stocks you can buy today. But potential investors should know that due to Jeff Bezos’ long-term mindset and lack of current earnings, the road ahead for AMZN stock will likely be bumpy.
So before you buy shares today, make sure you are the type of investor who can handle the volatility associated with owning growth stocks like AMZN.
At the time of this writing, Matt Thalman owned shares of Amazon.com. Follow him on Twitter at @mthalman5513.
