The key to successful investing lies in diversification, but what if you had to bet on a single ticker? In this scenario, the ideal candidate would be a company that itself is a mosaic of diverse ventures and innovations. One titan of e-commerce and cloud computing strikes me as a perfect pick for a single-name portfolio. This household name has its fingers in multiple pies, from artificial intelligence (AI) to groceries, making it a microcosm of the consumer and tech markets.
Of course, I’m talking about Amazon (AMZN -0.05%). Stay tuned to take a closer look at this jack-of-all-trades, exploring a company that has become synonymous with both innovation and reliability.
Amazon’s e-commerce empire
At the core of Amazon’s robust financial health lies its e-commerce segment, the business engine driving a staggering 84% of its total revenue in the third quarter of 2023. This overwhelming share underscores not just Amazon’s dominance in online retail, but also its profound influence on consumer habits globally.
The company’s strategies for growth, customer engagement, and innovation in e-commerce paint a picture of a business that is much more than just an online marketplace. Understanding this segment is key to grasping Amazon’s overall market strategy and its potential trajectory in the coming years.
The profit margins in Amazon’s retail operations have always been paper-thin. Even in the holiday quarter of 2020 — the golden age of coronavirus-driven sales growth — the operating margins stopped at 3.7% for the North American segment and 1% in international e-commerce. The financial profits dove deep into the red ink even then if you included the $9 billion of additional capital expenses to support Amazon’s infrastructure and overnight delivery system. This business isn’t cheap to run.
But Amazon wouldn’t be Amazon without its online marketplace, and this division remains crucial to the company’s long-term prospects.
- The sheer volume of Amazon’s sales allows it to benefit from economies of scale. This means that as the company produces or sells more, the cost per unit of production, distribution, or selling decreases. Very few companies can match Amazon’s massive heft, giving the company an important and hard-to-copy competitive advantage.
- High sales volumes contribute significantly to Amazon’s brand value and customer loyalty.
- The large number of transactions on Amazon’s platform generates vast amounts of data. Analyzing this digital treasure trove helps Amazon understand consumer behavior, preferences, and trends.
- Amazon’s diverse range of services and products creates numerous cross-selling opportunities. For instance, a customer purchasing a book might be shown advertisements for Amazon’s Kindle service or Prime membership. This strategy not only boosts sales in other departments but also enhances customer engagement with the larger brand.
- Amazon’s market dominance gives it substantial negotiating power with suppliers and partners. This can lead to better deals, exclusive products, or favorable terms, further strengthening its market position.
So Amazon’s e-commerce margins may be slim or even negative, as they were in the recent third-quarter report, but this division still serves many useful purposes. Besides, every retailer faces similar margin pressures. For instance, Costco‘s (COST 1.09%) operating margin would have stopped at 1.6% in the most recent quarter if it didn’t run a highly profitable membership program. Walmart‘s (WMT 0.94%) most recent operating margin in the U.S. retail segment landed at 3.9% — hardly a river of gold. In all cases, massive selling volumes make up for the minuscule margins, and Amazon enhances its bottom-line income with the qualities listed above.
Beyond retail: Amazon’s lucrative tech ventures
While Amazon’s e-commerce segment may grab most of the spotlight, it’s the Amazon Web Services (AWS) division that often steals the show in financial reports.
AWS, a pioneering leader in cloud computing, has become a linchpin in Amazon’s diversified business model, contributing significantly to its profit margins. In fact, AWS routinely delivers larger operating profits than the total retail operations, despite a much smaller revenue stream. In Q3, for instance, AWS saw $7 billion in segment-level operations while the two retail sections added up to $4.2 billion.
AWS is more than a general-purpose computing platform. The cloud computing service is also a premium provider of specialized computing capacity in exciting fields such as AI and quantum computing. Amazon resells tools and services created by other companies, and also delivers cutting-edge research and product development of its own.
Amazon’s platform holds a global share of 32% in the cloud computing market, ahead of runner-up Microsoft (MSFT -0.16%) Azure and bronze medalist Alphabet‘s (GOOG -0.97%) (GOOGL -0.81%) Google Cloud. This trio collected a combined $45 billion of this sector’s $68 billion revenue opportunity in the third quarter.
The one-stop shop for savvy investors
Amazon’s evolution from a humble online bookstore to a global powerhouse encapsulates its dynamic growth and strategic vision. The sector-spanning titan that Jeff Bezos built offers a blend of e-commerce, AWS, and ventures into new technologies. Together, these ideas offer a unique mix of stability and innovation.
In a market full of tempting choices, Amazon stands as the holistic investment option above all others, making it the ideal single stock for a forward-thinking portfolio.
Mind you, I would still prefer to build a diverse portfolio of at least 20 stocks around the Amazon cornerstone, but thought experiments like this one can be helpful and interesting.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Costco Wholesale, Microsoft, and Walmart. The Motley Fool has a disclosure policy.
