The growth of Amazon.com (AMZN 3.43%) is remarkable. In less than 25 years, it has become one of the biggest retailers in the world. It has successfully expanded well beyond selling books to cloud service solutions, advertising, digital streaming, and smart speakers.
What started as a handful of employees, including founder and CEO Jeff Bezos, on their hands and knees packing orders is now a global operation with 750,000 employees and $265 billion in sales. Obviously, the stock has made some early investors a lot of money. But how much?
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The ultimate growth stock
Amazon first sold shares to the public on May 15, 1997. The initial public offering (IPO) was priced at $18 per share. There have been three stock splits, all between 1998 and 1999. Two of the splits were 2-for-1, while the other was a 3-for-1 split. The way splits work is that you receive more shares, but the stock price is adjusted accordingly so the value of your investment stays the same -- it's not free money.
So, if you invested $500 at the IPO price, you would have purchased 27 shares. You would now have 324 shares after the stock splits. Those shares would be worth $568,620 at the current price of $1,755 per share.
You wouldn't be an Amazon millionaire yet, but that's an amazing return of about 36% compounded annually, or a total return of 113,000%.
Investors who stuck with Amazon through the roller coaster ride of the dot-com bubble around 2000 would have been handsomely rewarded for their patience. The stock soared from a split-adjusted IPO price of $1.50 per share to $106.69 per share on Dec. 10, 1999. From there, it proceeded to fall 96% until it bottomed on Sept. 28, 2001, at $5.97 per share.
It's amazing to think about it, but even if you had bought Amazon shares at the peak of the tech bubble in December 1999, you would still be up more than 1,500% on that investment. It's an important lesson that investors tend to undervalue fast-growing companies with massive opportunities to expand. Just because a stock looks overvalued doesn't mean it is.
From its founding through 2001, Amazon was unprofitable and was bleeding cash as it invested heavily in marketing, technology, and fulfillment to expand. In 2002, the business became free cash flow positive and has remained so every year since.
Free cash flow has always been Bezos' preferred metric for gauging the profitability of the company. In his first letter to shareholders, Bezos stated, "When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows."
Today, Amazon generates more than $20 billion in free cash flow. The growth of Amazon Web Services (AWS) has had a lot to do with increasing profits and free cash flow in recent years. AWS accounted for about two-thirds of the company's operating income in the third quarter of this year.
What's next?
Despite the phenomenal return of the stock, Amazon still has a very small share of the $3.5 trillion e-commerce market. There is also a lot of the world Amazon has yet to penetrate meaningfully, so the company still a lot to offer investors.
Plus, Amazon has already proved it can find new categories or areas where it's competent to provide a competitive service, like online advertising or the Internet of Things. Amazon has come such a long way in just 24 years. I wouldn't underestimate the company's potential from here.
