If I Could Buy Only 1 Stock, This Would Be It


I’ve often exhorted investors to stick to their best ideas. Here’s why: Imagine that you had 100 stocks you were interested in, and you researched each of them to determine their health and growth potential. Then you ranked them from No. 1 to No. 100. If you had money to invest, you might spread it across all 100 companies, but why put money into your 78th-best idea or even your 59th-best idea, when you could put much of your moola into your top 10 or 20 stocks?

You don’t want to overdo it, of course, and put all your money on just your top idea. Still, the researching-and-ranking exercise can be interesting and instructive — and it’s kind of fun to see which company comes out on top. Here’s a closer look at a company that would be my own No. 1 — or close to it.

A young girl in glasses is holding up one finger and carrying a book.

Image source: Getty Images.

Perhaps you’ve heard of… Amazon?

Amazon.com (NASDAQ:AMZN) has been an amazing investment for many years now, and its future still seems quite rosy. Its stock debuted on the market in 1997, and it has grown in value more than 175,000% in that time, averaging more than 36% per year. The company recently sported a market value near $1.6 trillion, which might make you wonder whether it has much more growth potential. The answer, fortunately, is that it does — it’s not too late to invest in Amazon with the expectation of solid long-term gains.

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That’s in part because Amazon is no longer just in the business of selling books, as it was when it started, and it’s become much more than just a massive, dominant online retailer as well. Its cloud-computing business, Amazon Web Services, is a rapidly growing part of its business, generating a whopping $13.5 billion in operating income in 2020, up 47% over year-earlier levels — and representing almost 60% of total operating income for Amazon. (Amazon’s total revenue of $386 billion in 2020 popped 36% year over year.)

The Amazon arena also includes Whole Foods Market, Zappos, Audible, Goodreads, and more. Amazon is also a major video streaming service, and we can expect it to continue entering new businesses over the coming years. Amazon’s Prime service is another jewel, featuring hundreds of millions of members who pay a subscription fee (that’s dependable, recurring revenue for Amazon) for access to an ever-growing bundle of services, such as fast shipping, Prime Video, Prime Reading, Amazon Music Prime, Prime Gaming, Amazon Photos, and more. 

That’s a huge group of businesses and services under Amazon’s roof, and it’s continually looking to grow by adding more services, expanding into new product markets and into more international markets as well. It’s aiming to grow its business in India, for example — a country with more than a billion people. And it’s eyeing healthcare as a new market to conquer.

Valuation

Despite all these appealing factors and all this growth potential, Amazon’s stock, unlike many other growth stocks these days, doesn’t appear grossly overvalued. Indeed, its price-to-earnings (P/E) ratio was recently just … 73. Yes, that is a steep P/E ratio, but understand that for most of its life, Amazon stock has seemed overvalued, keeping many rational investors away, while continuing to grow and grow. The stock’s five-year average P/E, for context, was recently 162 — making that 73 look pretty low. The stock’s forward-looking P/E was recently 60, comparing favorably with the five-year average of 86, while the price-to-cash-flow ratio was 24, versus a five-year average of 30.

Breakup concerns

Some investors may be avoiding Amazon stock because of a heightened antitrust interest in Washington and fears that the company, along with some other tech behemoths, might get broken up. That’s actually not necessarily a bad thing for investors, though. If Amazon were split into, say, three companies, investors would likely get a piece of each company, so that they could continue to benefit from their ongoing growth. Indeed, in many cases, company spinoffs have “unlocked” value — and Amazon’s parts may be worth more apart than together.

If you’re not yet an Amazon shareholder and you’d like to be, take a closer look at the company. It certainly looks like it has a lot more growth ahead.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.




View more information: https://www.fool.com/investing/2021/03/15/if-i-could-buy-only-1-stock-this-would-be-it/

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