You can break stock investing into two different styles: growth and value. Growth stocks have outperformed lately as the S&P 500 Growth index returned 37.9% over the last year through Nov. 22. That’s about 10.9 percentage points higher than the S&P 500 Value index.
Naturally, you’ll want to pick a company that can sustain the momentum. Fortunately, Amazon (NASDAQ: AMZN) still has strong growth potential. That may surprise some, given how fast the company’s sales have grown since its 1997 initial public offering (IPO). Annual sales went from about $148 million to $470 billion during this period.
While sales likely won’t grow at that breakneck pace, Amazon remains my top growth stock.
Image source: Getty Images.
Growth engine
Amazon Web Services (AWS) has been growing sales at a rapid clip for some time. That seems set to continue for the foreseeable future. Growth may accelerate as companies and organizations continue rapidly adopting artificial intelligence (AI).
AWS is Amazon’s cloud-computing business that offers various services from its data centers. Organizations have increasingly been using data to make key decisions, and that seems set to continue as they keep using machine learning and AI.
The unit’s sales grew more than 19% to $27.5 billion. With the highest operating margin out of Amazon’s three segments, it remains a key profit driver. AWS’ operating income increased nearly 50% to $10.4 billion and accounted for 60% of Amazon’s total operating profit.
Since these centers require large amounts of space and energy, AWS’ large size remains a competitive advantage. AWS has a market-share lead of 31%, in this fast-growing area. That’s followed by Microsoft‘s Azure (20% share) and Alphabet‘s 12% share. Several smaller competitors have less than 5% of the market.
Other areas
Amazon’s other two segments, North America and international, encompass wide-ranging businesses. These include its online and physical retail operations, subscription services like Prime, and advertising.
These have been performing well, albeit at a lower profit margin than AWS. North America’s third-quarter sales grew 9% to $95.5 billion, and International’s sales increased 12% to $35.9 billion.
Within these divisions, advertising and subscription services stand out. The mountains of data that Amazon collects is a gold mine for advertisers. Advertising services continues to experience rapid sales growth, including 19% in the latest quarter. Subscription sales, which include the popular Prime service, grew its top line 11% during this period.
High expectations
Over the last five years through Nov. 22, Amazon’s stock has gained 125.8%, easily outpacing the S&P 500‘s 91.9% appreciation. The company’s success isn’t lost on investors, which is why Amazon’s stock trades at a premium valuation.
The shares have a 42 price-to-earnings ratio (P/E). That compares to the S&P 500’s 31 P/E multiple.
But this valuation isn’t based merely on the company’s past performance. With a leading market position in a fast-growing segment, Amazon’s highly profitable AWS business should continue leading the way. And investors shouldn’t forget about the company’s other businesses. Although these businesses are less profitable, people still subscribe to Prime and order online for the convenience, fast delivery, and low prices.
As a result, I think it’s worth paying a higher price for a quality growth company. And you can start with a modest sum, like $3,000, which you can add to regularly over time. That way, you’ll build a tidy sum as your investment appreciates.
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*Stock Advisor returns as of November 25, 2024
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. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.