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Why Amazon Is Like Steroids for Your Portfolio

By Parkev Tatevosian, CFA – Aug 18, 2020 at 7:00AM

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This stock has the potential to turn any portfolio into a top performer, if you hold it for the long term.

Steroids can lead to some explosive performance gains, but those gains could come at a cost to your health. Amazon.com (AMZN 0.58%) stock is like that in some ways. It offers the potential for incredible gains -- for instance, Amazon's share price increased to over $3,000 recently from a little under $2,000 at the start of 2020. Still, the stock has gone through some rough patches in the past few years, having dropped by 10% or more several times. 

The coronavirus pandemic created even more volatility for the company. In its most recent quarter, Amazon had to spend $4 billion to keep employees safe and deliver products to customers. However, as people are trying to reduce the trips they make to stores, they're relying on Amazon to provide everything from essentials to discretionary items. So let's take a closer look at why holding Amazon shares in your portfolio could boost its performance -- in a good way -- over the long term.

A man's hand draws an upward-sloping line, with the  word performance written above it.

Image source: Getty images.

Amazon is primed for success 

Long before COVID-19, countless millions of people already relied on Amazon to deliver the things they needed. As of January, the company reported 150 million Prime members -- who not only pay a subscription fee but also shop on Amazon more than non-Prime members do.

The surge in orders resulting from COVID-19 probably added millions more to these totals, as net sales increased by 40% to $89 billion in the company's second quarter. It's one thing to grow 40% off a small base, but to increase sales 40% off a prior-year total of $63 billion is massive. What's more, it shows investors that Amazon's size doesn't hamper its growth and that it can sustain its remarkable growth beyond the short term.

The revenue boost created significant economies of scale for Amazon. Net income doubled year over year, from $2.6 billion in the second quarter of fiscal 2019 to $5.2 billion in Q2 of 2020. Fueling that earnings growth was its Amazon Web Services (AWS) segment. Even though AWS accounted for just 12% of the company's sales in its most recent quarter, it made up 58% of operating income. The good news for investors is that this segment is thriving, with sales increasing 31% from the same period a year ago.

A group of boxed parcels sit on a doorstep.

Image source: Getty images. 

Amazon looks to thrive in the long run

In its most recent quarter, Amazon more than doubled grocery delivery capacity and tripled grocery pickup locations. As people look for ways to reduce trips to stores, Amazon will be in good position to provide this vital service. Millions of people will be trying Amazon's services for the first time, and a portion of them are likely to stick around and remain customers for the long term

On the other hand, costs remain high for the company, which announced it will spend another $2 billion in the third quarter on coronavirus-related expenses. Still, at the midpoint of $3.5 billion, operating income is expected to be roughly 10% higher in the third quarter of 2020 than in the comparable quarter last year.

Overall, while the coronavirus pandemic is causing a surge in both revenue and expenses, the former is likely to last longer than the latter. When the novel coronavirus has run its course, the company will have attracted millions of more customers to its business, and it will be able to substantially reduce the costs associated with the pandemic. When that happens, the combination of increasing revenue and decreasing expenses will be like steroids for portfolios that include Amazon's stock

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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