The e-commerce giant has every reason to continue to perform well in the coming years.
Amazon (AMZN -2.56%) has been a big winner over the past 20 years, creating huge wealth for investors.
But for investors who haven’t bought the stock yet, is it now too late to add Amazon to your portfolio? To answer that question, here are his three questions: Is it a good business? Are there good prospects? And is the stock price attractive?
Is Amazon a good business?
There are many ways investors can evaluate a company’s business model. Two factors to evaluate are customer retention and barriers to entry.
Customer retention refers to the degree to which customers are loyal to a particular company or brand, making it difficult for them to switch to a competitor. In the case of Amazon, the customer capture rate is quite high for several reasons.
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Let’s take e-commerce as an example. Amazon is the largest e-commerce platform in the United States, offering the widest selection of products at competitive prices. This allows customers to easily find almost anything on Amazon (at attractive prices) without using his second platform. Additionally, Amazon’s extensive delivery network allows customers to receive their orders very conveniently (and quickly). Customers in metropolitan areas can order a wide range of products and receive them the same day.
All of the above plus Amazon’s Prime membership. This allows customers to pay affordable prices and receive a wide range of benefits such as free shipping, streaming services, exclusive deals, and other perks. Because Prime adds perks over time, customers have no reason to change their online shopping provider, especially once they have built a habit of shopping on Amazon.
The next aspect is to assess the entry barriers for competitors to take market share from Amazon. Again, Amazon scores highly for several reasons. For example, Amazon is the largest e-commerce platform in the United States (37.6% market share) and has significant scale advantages over competitors and new entrants. This advantage of scale allows Amazon to obtain very attractive prices on purchases and (thanks to operating leverage) to operate with the lowest operating costs, allowing it to maintain a low-pricing strategy.
Additionally, Amazon offers one of the best (if not the best) online shopping experience due to its huge investments in infrastructure and technology (operations, logistics, etc.) over the years. It would take competitors years (if not decades) and significant capital to rebuild such infrastructure.
In short, Amazon’s high customer capture rate and huge entry barriers have established it as the dominant e-commerce platform in major markets, making it difficult for anyone to replace.
What is the outlook for Amazon over the next few years?
Amazon has been an outstanding growth stock in the past, but if it doesn’t continue to grow, it won’t be useful to new investors. The good news is there’s good reason to be optimistic about Amazon’s prospects over the next few years.
Let’s start with cloud computing, Amazon’s other major business after e-commerce. Amazon Web Services (AWS) has a 31% market share in the cloud infrastructure market globally. Like its e-commerce sibling, AWS enjoys economies of scale and passes them on to its customers at lower prices. High switching costs when changing providers make it difficult for new entrants to offer a wide range of services at low enough prices to attract customers. Still, competition risks from established technology giants exist. microsoft and alphabet –These companies are also aggressively growing their cloud businesses, so their market share will increase over time at Amazon’s expense. However, given the significant tailwinds ahead, such as the ongoing migration to the cloud and the development of artificial intelligence (AI), there is ample growth opportunity for multiple companies to thrive.
Similarly, Amazon’s total market share in the US retail market is less than 10%, so despite having a large share in the online market, Amazon still has a long way to go in developing its e-commerce business. The company can rely on continued e-commerce penetration and increased offline store expansion to expand its retail market share in the long term. Additionally, it may rely on overseas expansion in emerging markets like India to keep the growth machine turning.
In other words, Amazon (despite its massive size) is likely to continue to grow in the near future.
Can investors buy stocks at a fair price?
Investment analysis is not complete until an investor considers the valuation of a stock. The focus here is to avoid overpaying for the stock, regardless of the quality of the underlying business.
Although an endless number of valuation tools are available, investors can choose a simple metric. It’s more about being roughly right than being exactly wrong. For example, if we use a simple ratio such as the price-to-sales (PS) ratio, we can see that Amazon’s current PS ratio of 3.4 is close to its average level over the past five years. Over the past five years, this ratio has reached a low of 1.7 and a high of 5.6.
So buying Amazon stock today, while not offering investors any discount, is probably still acceptable given the quality of the company’s business and its future prospects.
Investors with strong conviction and a long-term horizon (at least 3 years) can consider adding Amazon stock to their portfolio.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Lawrence Nga has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: His long January 2026 $395 call on Microsoft and his short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
