When Jeff Bezos founded Amazon (NASDAQ:AMZN) in 1994, it started as an online bookstore. But over the last 26 years, the company has not only become the largest e-commerce retailer in North America, but also expanded into other markets as well. And that diversity has been one of Amazon's greatest strengths, helping the company achieve a valuation that currently exceeds $1.5 trillion. Here's why Amazon's varied businesses still hold plenty of potential for investors. 

E-commerce

Currently, Amazon owns nearly 39% of the e-commerce market in the U.S., while Walmart (NYSE:WMT) ranks second with just over 5%. That's a staggering lead, especially since Walmart is the largest retailer in the world by revenue. But Amazon's first-mover advantage has helped it stay ahead of the competition, allowing the company to build a substantial fulfillment and logistics network, and to amass an enormous consumer base. Today, nearly 50% of internet users in the U.S. start their search with Amazon when shopping online, and the number is even higher for members of Amazon's Prime subscription service. As a result, Amazon's market share is actually getting bigger, and its e-commerce revenue growth has accelerated during the pandemic. 

Segment 2016 2017 2018 2019 TTM
E-commerce Revenue Growth  23.1% 22.6% 18.2% 17.7% 33.5%

Source: Amazon SEC filings. E-commerce includes online stores and third-party seller services. TTM: trailing-12-months.

Despite Amazon's success, e-commerce accounts for less than 15% of all retail sales in the U.S., and roughly 16% of retail sales globally. While not everything can be easily sold online, this figure indicates that Amazon has plenty of opportunity in the years ahead.

Online shopping

Image source: Getty Images

Cloud computing

Amazon Web Services (AWS) is the world's leading provider of public cloud services, with an estimated 32% market share. By comparison, Microsoft (NASDAQ:MSFT) Azure ranks second with 19%, and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Cloud Platform ranks third with 7%. Thanks to its robust product offerings from storage to complex computing, Gartner recently named AWS a leader in cloud infrastructure and platform services for the 10th consecutive year.

Amazon's first-mover status has been a considerable advantage in this market as well. It gave the company a head start, allowing it to build a sticky product and a large user base before it had any real competition. That early edge has created high switching costs over the years. Not surprisingly, these advantages have translated into strong revenue growth, though it has slowed in recent years.

Segment 2016 2017 2018 2019 TTM
AWS Revenue Growth 55.1% 42.9% 46.9% 36.5% 31%

Source: Amazon SEC filings. TTM: trailing-12-months.

Gartner estimates that public cloud services will account for 14% of global IT spend by 2024, up from 9% in 2020. That continued shift toward the cloud should help AWS grow in the coming years. And because cloud computing is a higher-margin business than the larger e-commerce segment, Amazon should become increasingly profitable as AWS accounts for more of total revenue.

Digital advertising

Digital advertising appears to be Amazon's next big opportunity. With products like Amazon Publisher Services and Amazon Advertising , the company profits from both the buying and selling of digital ad space, both on and off its platforms (Amazon Fire TV, Twitch, Amazon marketplace). While Amazon ranks a distant third in terms of market share, behind Facebook (NASDAQ:FB) and Alphabet, the company currently captures an estimated 8.6% of digital ad spend in the U.S., and that figure is growing.

  2018 2019 2020* 2021*
Digital Advertising Market Share (U.S.) 6.8% 7.6% 8.6% 9.7%

Source: eMarketer (Oct. 2019). *Estimated.

Investors should pay attention to this part of Amazon's operations. Like cloud computing, digital advertising is a higher-margin business than e-commerce . If Amazon continues to gain momentum in this market, it could make Amazon more profitable as a whole.

Putting the pieces together

Amazon has been strategic in diversifying its business, but the company's beginnings in e-commerce have always played a crucial role. In the early days, as Amazon's marketplace began to grow, the company's need for centralized infrastructure services like computing, storage, and databases became the foundation for AWS. Likewise, Amazon's success in e-commerce has helped the company build a massive consumer base (and collect lots of consumer data). And a wide, well-defined audience is valuable to both ad buyers and ad sellers, which has allowed Amazon to easily transition into digital advertising.

In the years ahead, Amazon could use its global scale and trusted brand to further diversify its business. For instance, the company has dabbled in digital payments, healthcare, gaming, and streaming media. Any of those could be Amazon's next big opportunity. However, investors should remember that Amazon is already a very large enterprise, and the company's hypergrowth days are likely in the past. Any future endeavors would have to be extremely successful to move the needle in a big way. 

A final word

Amazon's dominance across an expanding list of industries has drawn regulatory scrutiny and surfaced antitrust concerns. Investors should pay attention to this situation -- it is possible that Amazon could split its business, either by choice or by force. While this wouldn't necessarily be a dealbreaker, it would reduce the company's diversity and weaken certain advantages. For instance, Amazon can currently afford to run its e-commerce operations at low margins, or even at a loss, thanks to the highly profitable cloud computing segment. That would change if the company split.

Even so, Amazon is still a well managed business with a strong competitive position in several growing markets. And companies with those attributes are often rewarding long-term investments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.