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If I Could Buy Only 1 Stock, This Would Be It

By John Ballard – Oct 28, 2021 at 7:28AM

Key Points

  • Amazon's profits are booming as non-retail businesses continue to grow as a percentage of total revenue.
  • The tech titan still has abundant opportunities in an expanding $4.9 trillion global e-commerce market.

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Growth in Prime memberships has created a very profitable flywheel around Amazon's retail operation.

Amazon (AMZN 3.04%) generated a staggering $443 billion in revenue on a trailing-12-month basis through the second quarter. The e-commerce giant has growing operations in such diverse fields as transportation, advertising, cloud services, and entertainment -- and that's just skimming the surface. 

If I had to put all of my available cash in one stock, I can't think of a better vehicle to protect and grow that money than Amazon. It probably has as wide of a competitive moat as any business in the world, and when we look at where the company was seven years ago compared to today, there's a good chance Amazon's moat is going to widen even further over the next decade.

Amazon Prime delivery truck.

Image source: Amazon.

The Amazon flywheel is kicking into high gear

Amazon is still primarily an online retail business. Revenue from online stores made up 51% of Amazon's total sales in 2020, but over the last seven years, around half of Amazon's sales growth has come from non-retail sources that were generating very little revenue in 2014. 

A bar chart showing Amazon's growth in revenue by product segment.

Data source: Amazon. Chart by author.

Higher-margin revenue from non-retail categories -- such as third-party seller fees, Prime subscriptions, "other" (advertising), and Amazon Web Services (AWS) -- generated 45% of Amazon's total revenue in 2020, up from 23% in 2014. Along with that increase, Amazon's profitability has soared, which should continue to improve as management keeps investing behind these growth drivers.

AMZN Net Income (TTM) Chart

AMZN Net Income (TTM) data by YCharts.

Amazon appears to have a lot of room to keep growing these smaller but more profitable areas of its business. For example, CFO Brian Olsavsky said during the second-quarter earnings call that Amazon's advertising business is "innovating at a fast clip, launching over 40 new features and self-service capabilities in the quarter, making it easier for sellers, companies, and authors to grow their businesses by helping customers discover their brands and products." 

Amazon reports its advertising revenue under the "other" category, which grew 83% year over year in Q2. 

Of course, things like advertising and third-party seller services only exist because of the hundreds of millions of customers that shop at Amazon. While Amazon last reported having more than 200 million Prime subscribers earlier this year, its actual global customer base is likely at least double that. One analyst estimates there are probably as many as 600 million Amazon customers in total, but it's those Prime members that really expand Amazon's competitive moat.

Amazon has a tremendously powerful flywheel going right now. It all centers around the company's vast selection, retail services, physical stores, third-party sellers, smart-home products (Echo and Alexa), and add-on Prime perks like streaming and personalized apparel styling (Personal Shopper by Prime). 

What's most exciting is that Prime memberships are still growing: Amazon reported adding 50 million new members since the start of 2020. This is causing Amazon to continue investing in infrastructure and technology to meet demand. On a trailing-12-month basis, spending on capital expenditures and finance leases grew 74% year over year compared to the prior trailing-12-month period. 

Amazon can grow for a long time

Amazon is a large business, but the $4.9 trillion global e-commerce market is still expanding faster than brick-and-mortar retail sales. The retail side of Amazon should be able to grow for many years. That should lift its profit margin even higher, since growth in the retail business will continue to attract more advertisers and third-party sellers that want their products in front of a growing number of Prime shoppers.

With the addition of Amazon's fast-growing cloud services business, where AWS contributes most of the company's operating profit, growth investors can kill many birds with one stone here. Amazon is a great investment that I plan to hold for a long time.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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