In a world where anything can happen, betting one's entire financial future on one stock is a dangerous risk. Due to such potential pitfalls, some investors entirely avoid individual stocks, preferring mutual funds and exchange-traded funds (ETFs) instead.
Individual stock investors will more likely serve themselves well by considering a fund-like approach, building a portfolio of multiple holdings in different industries. However, should stockholders risk everything in one company, Amazon (AMZN +1.54%) stock is one of the least likely to go wrong for investors (and quite likely to go right).
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The state of Amazon
Despite being only one company, Amazon is diversified in the sense that it encompasses numerous businesses. Most consumers know the internet and direct marketing retail stock as the world's largest e-commerce company. E-commerce drives the majority of the company's revenue. Its $408 billion in worldwide net sales in 2019 was second only to Walmart in size.
NASDAQ: AMZN
Key Data Points
Its e-commerce arm has spawned numerous other businesses. Physical stores, third-party seller services, subscription services such as Prime, online advertising, and other ventures also account for much of this income.
Moreover, it has finally begun to break out digital ad revenue, which grew 32% in the latest quarter. Grand View Research forecasts a compound annual growth rate of 41% per year for online advertising through 2027, a factor that should bode well for Amazon given its extensive web presence.
However, its most successful business is Amazon Web Services (AWS). AWS began as an IT service to support its online commerce efforts. It evolved into a separate, non-e-commerce business when Amazon saw its potential to transform IT, and it pioneered the cloud computing industry.
AWS generated $62 billion for the company in 2021 and accounted for most of Amazon's operating income. Additionally, Grand View Research estimates the global cloud infrastructure market will grow at a 16% CAGR by 2030 to an estimated size of just over $1.55 trillion. Since it holds a market share of 32%, the industry's largest according to ParkMyCloud, AWS has positioned itself to benefit from cloud growth.
How Amazon holds up financially
Amazon's businesses helped Amazon generate $470 billion in net sales in 2021, a 22% increase compared with 2020. Despite a 23% increase in operating costs due to labor and supply chain pressures during that period, net income came in at $33 billion, a 57% increase. An $11.8 billion gain from Rivian Automotive equity securities was the most significant contributor to the increase in profits, and Amazon revealed its 20% stake in Rivian in 2021.
Admittedly, Amazon is not immune to a slowdown in e-commerce amid COVID-19-related reopenings. In the first quarter of 2022, the company guided to between $112 billion and $117 billion in revenue. This means an increase of between 3% and 8%, a dramatic slowdown from past quarters. In this environment, Amazon stock experienced no net growth over the last 12 months, an unusual slowdown for a company that has significantly outperformed the indexes over time.
AMZN data by YCharts.
But despite that performance, Amazon could deliver higher operating profits in 2022. Amazon should see continued growth in AWS and ad services due to industry growth. Also, with the recent price increase for its Prime service to $139 per year, double-digit revenue growth will likely resume.
Moreover, its P/E ratio has fallen to 47. This significantly closes the gap with Walmart, which sells for 28 times earnings, and Microsoft, which trades at a 32 P/E ratio. While it remains a more expensive stock, growth areas such as the cloud and online ads could make Amazon worth that higher multiple.
Amazon as a sole investment
Again, no stockholder should risk their entire net worth on one company, even Amazon. However, with numerous businesses in high-growth areas, Amazon offers diverse sources of revenue in high-growth businesses. If investors build a diversified portfolio that includes Amazon, the online conglomerate could serve well as a safe, market-beating holding.
