You can buy millions of items on Amazon — everything including, yes, the kitchen sink — with just the click of a “buy now” button. Each day in the stock market, traders buy (and sell) millions of shares of the e-commerce company, and the online retail giant that’s known for offering fast and free delivery has also delivered for investors. In the past 10 years alone, Amazon’s share price has surged about 1,500%.
The retailer has come a long way since the mid-1990s, when Jeff Bezos founded Amazon.com Inc. out of his garage in Seattle. In addition to Amazon.com, the company now owns Whole Foods Market, Zappos, Audible, Ring, Amazon Web Services (AWS), Kindle and Shopbop, among other companies. The e-commerce giant is part of an exclusive club, which includes Apple, because its market valuation has surpassed the $1 trillion mark. The company employs nearly 1.5 million people around the world.
The Seattle-based company dominates the stock market and is very popular among both everyday and professional investors, even though a key measure of valuation — the price-to-earnings ratio — makes Amazon more than twice as expensive as the S&P 500 Index. Since launching its initial public offering (IPO) in 1997 at $18 a share, Amazon’s share price has surged more than 19,000%. While the company completed three stock splits in the 1990s, it hasn’t done any since, and its share price crossed $3,000 for the first time in 2020. Even though the company has never paid a dividend and it's among the most expensive stocks in the Nasdaq 100 (based both on price and valuation), that’s done little to dissuade investors. Here’s how to decide if it makes sense to buy Amazon stock for your portfolio.
Amazon stock (AMZN) fundamentals
Amazon has come to be a part of virtually every aspect of our lives, from online shopping to entertainment to cloud storage to asking basic questions of Alexa. The company’s stock is also a vital part of the U.S. stock market, as the fourth largest component of the S&P 500. Because of Amazon’s dominance as both a company and a stock, the company’s every move is closely watched and big moves in its share price can, in turn, affect the broader market.
Amazon is listed on the Nasdaq stock exchange under the ticker AMZN. While the company has expanded far beyond e-commerce, it is still grouped in the consumer discretionary sector alongside retailers, restaurants and hotels, for example. Amazon is also a member of the tech heavy Nasdaq 100 index, and it’s part of the so-called FAANG group of stocks, which includes Facebook (now Meta), Apple, Amazon, Netflix, and Google parent company Alphabet.
When deciding whether you should buy Amazon stock, it’s important to first review the company’s financial information. You can easily access the latest earnings report on Amazon’s website, on and through the documents companies are required to file with the U.S. Securities and Exchange Commission (SEC). In these quarterly documents, you can review Amazon’s business, including details about its various business segments and profit.
Finally, you’ll need to understand what causes Amazon’s share price to move higher or lower based on the millions of shares that trade each day. By following news about Amazon from major financial publications — like CNBC, The Wall Street Journal, Bloomberg and Yahoo! — you can learn more about the company’s business, its competitors and industry trends. On a variety of financial websites, you can also find key information about the stock by entering its ticker, including its historical performance, valuation, and price-to-earnings ratio, and read reports written by Wall Street analysts that affect the stock price. Compared with some of the other large members of the S&P 500, insider ownership of Amazon shares (including Bezos and other company officers and directors) is significantly higher, at about 10%.
Amazon’s latest financial results
In the company’s fourth, Amazon reported revenue of $137.4 billion which was a 9% increase from a year ago, though slightly lower than the estimates of Wall Street analysts. Meanwhile, the company offered guidance for the first quarter that is lower than the forecasts of analysts, showing that the big boost that Amazon saw during the worst of the Covid-19 pandemic is waning. The company also delivered earnings per share of $27.75.
The retail giant reported a nearly $12 billion gain from its investment in Rivian, an electric vehicle car company. Amazon Web Services (AWS) — a huge profit driver for the company — saw its revenue jump nearly 40% year-over-year to $17.78 billion, beating analyst estimates.
The company also made an announcement that will certainly grab the attention of its more than 200 million Amazon Prime members: Prime subscriptions prices will be hiked up to $139 per year from $119.
Amazon’s shares jumped 12% during trading the morning after its earnings report, likely bolstered by the AWS and Rivian wins.
How Amazon stock fits into your portfolio
With a share price approaching $4,000, buying a whole share of Amazon may be too expensive for many investors who are beginners. The good news? You are probably invested in Amazon already, particularly if you own any index funds that track the S&P 500 or the Nasdaq 100. What’s more, Amazon is among the top 15 holdings in more than 200 different exchange-traded funds (ETFs).
If you are still keen to buy Amazon stock, you may be able to do so if your online broker offers fractional shares. Fidelity, Robinhood and Schwab are among the brokers that allow you to invest less than the full share amount. That said, it’s important to consider how much exposure you already have to any one stock, including Amazon. Even if you buy fractional shares, a stake of 5% or more in Amazon could make the performance of your investment portfolio too dependent on that one stock. You may also miss out on the diversification benefits of investing in a variety of other stocks. That’s why it’s important to seek out investment advice from a financial advisor before making any major changes to your portfolio.
Finally, it’s important to be mindful that both Amazon’s business and its investment prospects could change. Walmart long held the title of the world’s largest retailer outside China until Amazon surpassed it in 2021. Similarly, as investment advisors caution, Amazon’s past stock performance may not be indicative of future results. While Amazon shares have soared over long periods of time, it has experienced some steep slumps, including a bear market in excess of 20% after the company briefly reached a market cap of $1 trillion in 2018. In four of the past 10 years, Amazon’s returns lagged behind the total return for the S&P 500 — and it’s on track to do so once again this year.
How to buy Amazon stock in a brokerage account
Because of its steep share price, many people may opt for other ways to invest in Amazon if you already have an online brokerage account. You can do so by buying a mutual fund or ETF that has a large exposure to Amazon. Or, as mentioned above, you can buy fractional shares by specifying the dollar amount you want to invest.
If you are intent to buy Amazon stock, and that $3,000-plus share price isn’t an obstacle, there are two main ways to enter that order with your online broker: Either by placing a market order, which will be executed as soon as possible at the current market price, or a limit order, which lets you specify the maximum price you are willing to pay. Remember to be mindful of that 5% threshold if you do decide to buy full shares, so that Amazon doesn’t have a big impact on the overall performance of your investment portfolio.
Because Amazon is such a big player in the stock market, you really can benefit from the stock’s performance without holding it directly. For example, there are several ETFs in which Amazon accounts for more than 20% of the overall weighting including the Vanguard Consumer Discretionary ETF (ticker: VCR) and the Fidelity MSCI Consumer Discretionary Index ETF (ticker: FDIS). In addition to gaining exposure to Amazon, this type of strategy will help spread out your investment risks and you may also benefit from other companies that pay a dividend -- something Amazon has never done.
Diversification is very important, particularly if you’re relatively new to investing. Your portfolio’s performance should not be directly tied to any one stock, but rather benefit from a wide variety of about 20 different stocks, bonds, funds, and alternative assets. It’s also important to make sure you want to invest in the markets doesn’t have a better, short-term purpose, like going toward paying off high-interest debt (such as credit cards) or building up an emergency fund that could cover at least three months of expenses.
Finally, remember that both investors and consumers can be notoriously fickle. Another company could come along to challenge Amazon’s dominance in e-commerce or cloud storage, while investors may chase another hot stock. That’s why you should focus on a proven, long-term strategy: Invest in the market itself.