Investors allocate a portion of their hard-earned savings into the stock market in the hopes of achieving adequate returns over the long term. Sometimes, they get lucky and find a monster winner that significantly improves their financial well-being.
Amazon (NASDAQ: AMZN) falls into this category. Since its initial public offering in May 1997, the company's shares have rocketed 176,200% higher (as of April 17). A measly $570 investment 28 years ago would be worth a jaw-dropping $1 million today.
Will the future be just as bright? Will a $10,000 investment in this e-commerce giant, which trades 29% off its peak, make you a millionaire by 2035? Here are the most important things investors should consider.
Amazon's durable competitive advantages
Amazon's success can be attributed to its wide economic moat, which allows it to defend itself against competitive forces. Investors can be confident that this favorable setup likely won't change anytime soon.
The company's scale gives it a tremendous cost advantage. This is apparent in the e-commerce segment. Heavy investments to build out the logistics footprint and invest in technology and automation help drive down shipping costs, which benefits customers.
Amazon Web Services (AWS), the company's cloud computing service, has high fixed costs in terms of the network infrastructure needed to develop the platform. Thanks to its ability to leverage its expenses over a large customer base, AWS generates impressive profitability. AWS customers that have onboarded and become integrated with the various offerings also face switching costs.
Amazon also has a very powerful brand. This is true for both individual consumers and large business clients who expect top-notch features and a superior experience.
Lastly, there are network effects at play. As more buyers go to Amazon.com to shop, it makes the site more attractive for merchants. More merchants bring more selection, which increases the value proposition for consumers.
Taken together, it's difficult to envision a scenario where Amazon gets dethroned. It has sustainable competitive advantages across its entire empire that will continue supporting its success.
Looking at potential returns
In the past 10 years, Amazon shares are up about ninefold, which is a fantastic gain. Given the company's massive size, now at a market cap of $1.8 trillion, I'm confident that kind of return won't repeat between now and 2035. And for investors to turn a $10,000 cash outlay into $1 million in a decade, they'd need an unbelievable 100-fold gain, translating to an annualized return of 58%. This isn't a probable outcome.
Just because a seven-figure result isn't in the cards in 10 years, however, doesn't mean you should ignore this business. Amazon still looks like a smart stock to buy right now.
Besides the economic moat previously mentioned, the company has multiple secular trends working in its favor, like online shopping, artificial intelligence, and digital advertising, all growing end markets with huge potential in the long run. These tailwinds should allow Amazon to continue increasing the top line at a healthy rate, even though it raked in $638 billion in net sales last year.
The valuation is also at a reasonable level today. Investors can buy the stock at a price-to-sales ratio of 2.9. In the past five years, the average multiple has been 3.3, so the current setup presents a nice discount. It helps that shares have tanked since early February, due to heightened fears about the economy.
Spending $10,000 to buy Amazon stock won't make you a millionaire. But it's the right move for your portfolio.
Should you invest $1,000 in Amazon right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
