A healthy investment portfolio should hold many different stocks for a long time. Here at the Motley Fool, we recommend selecting 25-30 high-quality stocks and letting them grow for at least five years. Those are the most elementary principles of portfolio management, and I wholeheartedly believe in this philosophy.
However, every great journey must start with a single step. What if I had to start from zero today, picking a single stock to start my long-term investment strategy?
I think Amazon.com (AMZN -1.14%) would be a great place to start. Here's why.
The elevator pitch
Amazon is the greatest e-commerce company in the world, and one of the most experienced businesses in that sector. It is also a world-class provider of cloud computing services, it runs a video-streaming service with award-winning original content, and it has created an impressive infrastructure to handle inventories and fast shipments.
Many companies are trying to copy Amazon's incredible business model but there's nothing quite like the original. Amazon is building a powerful and flexible business empire for the long haul, and the stock should deliver market-beating returns for many decades.
E-commerce: The financial foundation
Amazon started life as a simple bookstore, cutting costs by relying on a lightweight business back-end and no costly physical store locations. The catalog grew over the years and now offers everything from hand soap to dirt bikes. The shipping infrastructure now includes the Whole Foods Market grocery stores and a partnership with department store Kohl's (KSS 4.53%). Amazon boosted its shipping capacity dramatically to handle the order growth during the lockdowns of the early coronavirus crisis.
And the online shopping business is a finely tuned cash machine. In July's second-quarter report, for example, Amazon's global e-commerce operations collected $101.5 billion of net sales. This massive financial platform earns Amazon a better credit rating than megabanks Bank of America or Goldman Sachs.
Cloud computing: The cash cow
The Amazon Web Services (AWS) business started as a hobby-level side project, generating some spare change by selling unused computing capacity in Amazon's data centers. Now, it's the company's more profitable and fastest-growing business segment. AWS sales rose 33% year over year in the second quarter and produced operating profits of $5.7 billion.
If Amazon wanted to spin off AWS as a separate company today, it would come with annualized top-line sales of $79 billion and bottom-line profits of roughly $17 billion. That hypothetical company would be worth at least $300 billion and as much as $800 billion, becoming an instant favorite of growth investors.
But Amazon CEO Andy Jassy has called the AWS spin-off idea "a long shot," and AWS CEO Adam Selipsky recently said that there are "no current plans" to separate the cloud-computing business. So Amazon investors get this exciting growth business included with the massive e-commerce service. You don't have to twist my arm to make me accept that value-boosting add-on.
Image source: Getty Images.
Amazon Prime: Customer loyalty 101
And then there's Amazon's true secret sauce -- the Amazon Prime customer loyalty program.
For $15 per month or $139 for a full-year subscription, Amazon Prime members get free and fast shipping for most Amazon orders. The subscription also includes access to services such as the Prime Video media-streaming platform, and Amazon Music portal for podcasts and music streams, and the Prime Try Before You Buy clothing-store feature.
Many members simply take advantage of the free shipping, largely ignoring the other Prime benefits. However, the media-streaming options appear to be pulling their weight lately. Prime Video now offers well-reviewed original shows such as The Wheel of Time, The Boys, The Marvelous Mrs. Maisel, and The Lord of the Rings: The Rings of Power.
It's hard to say exactly how helpful the Prime Video shows have been to Amazon's member-grabbing efforts, since the company is notoriously tight-lipped about data such as viewership figures or the exact number of Prime members. But the membership roll is estimated to hold approximately 160 million names. Take that number times roughly $15 per month, and you get an annual revenue contribution in the neighborhood of $25.5 billion. Prime is not quite as profitable as the Costco (COST -0.55%) membership program, since Costco's membership has minimal overhead costs while Prime includes expenses for shipping services and content production. But it's a unique feather in Amazon's hat, and Prime quietly supports Amazon's cash flows.
Amazon is a huge and complex business with several profitable facets. The company has been around for decades but continues to grow like a hungry start-up. If you're looking for the first stock to buy in a brand-new investment portfolio, Amazon strikes me as a fantastic choice. I don't recommend owning just one stock, but if I had to pick a single stock to buy today, Amazon would be it.
