Tech giant Amazon (AMZN 3.43%) recently announced a 20-for-1 stock split. If shareholders approve the measure in an upcoming annual meeting, Amazon should begin trading on a split-adjusted basis on June 6. While the move technically does not change the underlying strength of the company's business, shares were getting a bit steep, trading at nearly $3,000.
At the very least, Amazon's stock split will cut the stock price, making pieces of the company more accessible, especially to investors who are unable to purchase fractional shares. That being said, the company underperformed the S&P 500 over the past year. So, apart from the new stock price, why might everyday investors consider adding Amazon to their portfolio and holding for the long haul? Let's take a look.
1. A strong e-commerce business
Amazon is one of the most visited websites in the world and it dominates the U.S. e-commerce industry with a 41% market share, allowing the company to offer consumers a host of perks. One perk is price: Amazon routinely ranks as one of the cheapest online retailers.
Cheaper options represent an obvious selling point for customers and ensure Amazon's top position in the e-commerce industry. The online retailer also provides Prime members with free one-day shipping. In other words, Amazon saves shoppers both money and time. These benefits can hardly be overstated and set the company up nicely for continued success.
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2. A booming cloud computing unit
Amazon is also a pioneer in cloud computing, an industry with substantial room for growth: by some estimates, cloud computing will expand at a compound annual growth rate of 16.3% through 2026. That's because cloud computing solutions -- including data storage and analytics solutions delivered through the cloud -- confer businesses substantial benefits, such as improved efficiency, decreased costs, and flexibility.
Amazon Web Services (AWS) has become the cloud leader. As of the fourth quarter of 2021, AWS held a 33% share of the $180 billion market. Amazon's closest competitor, Microsoft Azure, trailed behind with a 21% slice of the pie.
The great thing about Amazon's cloud computing unit is that it offers much better margins than the company's traditional e-commerce business. In 2021, Amazon generated $469.8 billion in net sales, with AWS alone accounting for 13.2%, or $62.2 billion, of those total sales. However, AWS' $18.5 billion in operating income accounted for a whopping 74.5% of the company's total operating income of $24.9 billion in the same year. As AWS comes to generate an even larger portion of Amazon's revenue, the company's bottom line will reap positive results.
3. Multiple competitive edges
We can expect Amazon's success to continue well into the future due to two competitive advantages: the network effect and intangible assets.
Amazon's e-commerce business benefits from the network effect, which is when the value of a service increases as more people use it. When clients flock to Amazon's website, the platform becomes more attractive to merchants, who are eager to find a growing audience. As more sellers join the platform (and ultimately offer a greater number and diversity of items), customers will increasingly use Amazon's marketplace. According to some estimates, Amazon's third-party sellers surpassed the 6 million mark last year, with the company adding 2,000 new sellers every day. Meanwhile, Prime membership is growing at a rate of 30 million users per year.
Lastly, Amazon's brand name has become extremely powerful due to the company's ability to capitalize on these aforementioned advantages. Amazon routinely ranks among the most valuable brands in the world, landing fourth on Forbes' latest ranking of the world's most valuable brands.
The future is bright for Amazon
Despite all these positives, Amazon stock underperformed the market in the past year. But zooming out offers some much-needed perspective. In the past five years, Amazon shares have increased by 246%, compared to gains of 80.2% for the S&P 500. That's why investors should look beyond the company's recent struggles and settle in for the long-term.
This tech giant is a leader in two industries with significant upside and it possesses a solid moat to protect itself from competitors. Amazon is a buy for many reasons, and with an upcoming stock split, more investors can afford whole shares of this tremendously successful company.
