Everyone knows about Amazon (AMZN -0.31%). It's one of the most dominant, innovative, and disruptive enterprises that the world has ever seen. Today, it sports a monster market cap of $2.2 trillion, making it one of the most valuable companies out there.
Amazon has done a fantastic job of rewarding its perennial investors. Shares are up 853% in the past decade and 11,290% in the past 20 years (as of May 28). Even after such an incredible performance, the "Magnificent Seven" stock might still be a worthy portfolio addition today, especially since it trades 15% off its peak.
Here are three things that investors need to know about Amazon before they buy.
Image source: Amazon.
1. The growth isn't over
Between 2021 and 2024, Amazon's revenue increased by 36%. And according to Wall Street consensus analyst estimates, the top line will grow by 31% between 2024 and 2027. This is despite the business collecting a whopping $638 billion in sales last year.
There is still meaningful growth potential. Amazon is well positioned to ride the wave of four potent secular trends. Of course, there's online shopping and the ongoing rise of e-commerce. But the company should also be able to continue leveraging its strong competitive positions in cloud computing with Amazon Web Services (AWS), digital advertising, and artificial intelligence (AI).
Because Amazon's performance will be influenced by these tailwinds, I wouldn't be surprised if Wall Street's revenue forecast over the next three years proves conservative.
2. Multiple competitive advantages
Warren Buffett is an investing legend who loves to own businesses that have an economic moat. This just means that a company possesses durable competitive advantages that make it difficult for rivals to effectively compete in an industry. Amazon stands out because it has multiple factors working to its benefit.
For starters, the business has a powerful network effect, specifically with its amazon.com marketplace. As more buyers go to the site to shop, sellers find the platform more valuable. In turn, this attracts more buyers because the product selection keeps expanding. Plus, the Prime membership option perpetuates this positive feedback loop, as Prime customers are sticky and might spend more.
There's also a cost advantage that stems partly from Amazon's sprawling logistics footprint. Dense delivery routes keep shipping expenses low. And with its scale and sales base, the business also has buying power over suppliers.
Switching cost is another important competitive advantage, this one for AWS. Enterprise customers depend on Amazon as an IT partner, which will become truer as adoption of AI tools grows. These customers won't want the hassle of changing providers.
Investors can point to Amazon's wide economic moat as proof that this is an extremely high-quality company. There is minimal threat of disruption, which reduces risk.
3. Untapped earnings power
Amazon has historically focused on growing the top line at a brisk pace. Shareholders bought into management's strategy because they knew the business was investing aggressively in new growth vectors. This has worked, as demonstrated by the company's huge scale.
However, CEO Andy Jassy is figuring out ways to boost profitability, which is encouraging for investors. He wants to boost operational efficiencies and expense controls. As a result, operating income went from $24.9 billion in 2021 to $68.6 billion in 2024.
While investors probably appreciate seeing profitability continue to improve, the best course of action for Amazon's long-term success is for the leadership team to properly invest in opportunities to grow the intrinsic value of the business over time. In other words, Amazon's true earnings power is still untapped.
