Amazon Stock 101: A Primer For AMZN Investors

How does Amazon make money? How have share price and valuation behaved historically? Below are key facts for aspiring Amazon stock investors.
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Before investing in Amazon  (AMZN) - Get Report, it is important to understand a few things about the company and its shares. The Amazon Maven introduces this “Amazon Stock 101” article that is meant to help aspiring investors decide whether to buy equity in the e-commerce giant.

“Amazon Stock 101” is designed to be a living and breathing document. It will be updated regularly with new information, so bookmark this page and refer to it every so often.

Amazon’s history

The company was founded in 1994, in the Seattle metropolitan area, and started out as an online marketplace for books. The journey from bookstore to e-commerce powerhouse began when Amazon later expanded its product offerings to include music and videos, video games, electronics, and toys.

The year 2006 was an important one for the Seattle-based company. Back then, Amazon (1) turned its Amazon Web Services venture into a cloud infrastructure platform, the seed of what has become Amazon’s fast growing and high-margin cloud business today, and (2) expanded its e-commerce reach to third-party vendors by introducing “Fulfillment by Amazon”.

Today (May 2021, to be precise), Amazon is a hybrid company engaged, primarily, in three businesses: global e-commerce, consumer product and services, and cloud infrastructure. The conglomerate is the third most valuable company in the United States, at a market cap of $1.6 trillion.

Amazon’s revenues and op profits

Amazon is probably known, first and foremost, as an online retailer. But the company’s business model is much more complex than this. For instance, few probably know that most of Amazon’s operating profits do not come from e-commerce or other consumer offerings – not even from both combined.

The first set of charts below shows the split of Amazon’s revenues (on the left) and op profit (on the right) by segment, as of 2020. Notice that cloud infrastructure accounts for only 12% of sales, but nearly 60% of operating income, due to the segment’s much higher margins.

Figure 1: Amazon's 2020 revenues by segmend and Op profit by segment.

Figure 1: Amazon's 2020 revenues by segmend and Op profit by segment.

The following set of graphs is a breakdown of Amazon’s revenues other than AWS. The lion’s share of sales comes from the online stores, at nearly 60% revenue share. However, third-party sellers stand out as a faster-growing sub-segment, with revenues having jumped 50% year-over-year in 2020.

Figure 2: AMZN non-cloud revenues/growth by sub-segment.

Figure 2: AMZN non-cloud revenues/growth by sub-segment.

As a footnote, the small but fastest-growing “other” bucket represents primarily sales of advertising services. The smallest and slow-growing physical store sub-segment combines brick-and-mortar initiatives like Amazon Fresh and Amazon Pop Up.

Who Owns Amazon Stock?

(Updated on June 16, 2021)

It is most common for institutions to own the lion’s share of a large publicly traded company’s equity. The top investors in most mega-cap names tend to be the behemoths of the asset management industry.

Today, nearly 60% of Amazon stock is held by institutional investors. The top five names, accounting for over one-fifth of the company’s equity, are ETF and mutual fund powerhouses Vanguard (6.5%), BlackRock (5.6%), State Street (3.2%), T.Rowe Price (3.1%) and Fidelity (3.0%).

As a fun fact, Amazon’s institutional ownership is relatively small, compared to other FAAMG peers. Only Apple’s  (AAPL) - Get Report ratio is lower, and not by much: 59%. See chart below.

Figure 3: AMZN institutional ownership by peer.

Figure 3: AMZN institutional ownership by peer.

(Read more on this topic: Who Owns Amazon Stock?)

Jeff Bezos and the CEO transition

(Updated on June 16, 2021)

The top holder of Amazon shares, by quite a bit, is founder Jeff Bezos. According to Yahoo, the CEO (soon to be former chief executive) owns about 51 million shares of Amazon stock, for a stake worth over $165 billion as of May 2021. Mr. Bezos’ Amazon position accounts for nearly all his net worth.

The celebrity founder, while likely to remain a top shareholder, will undergo one of the most closely followed CEO transitions in Corporate America. In July, Jeff Bezos will step down from the chief executive officer position and hand over the baton to head of Amazon Web Services Andy Jassy.

Mr. Jassy joined Amazon early in the company’s life, in 1997, when he was in his late 20s and had just completed his Harvard MBA. He was charged with running the Amazon Web Services division when it was still quite small, in the mid-2000s, before the business blew up and became a cloud infrastructure giant.

(Read more on this topic: A Look At The New Amazon Without CEO Jeff Bezos)

Amazon’s split history

(Updated on June 16, 2021)

Amazon is no stranger to stock splits, but the last one has not happened in a while. Below is the short list of previous AMZN splits; the split ratios; and how share price behaved immediately following each event:

  • June 1998, 2-for-1: only about one year after Amazon became a public company, its stock was split for the first time. From the original IPO price of $18, AMZN had climbed to $87 as of the event date. Within only one month of the split, Amazon stock had gained a whopping 84%.
  • January 1999, 3-for-1: barely half a year went by since the first split, and Amazon shares were parted in three. One month after this second event, Amazon stock had declined 7%. However, much of the upside in share price may have already been captured since the IPO: a 30-fold increase in less than two years, fueled in great part by the historic dot-com rally.
  • September 1999, 2-for-1: during the late stages of the internet bubble, Amazon executed its last stock split. One month after it, Amazon stock had climbed another 31%. The bursting of the bubble, starting in March 2000, put an end to Amazon’s share split run.

(Read more on this topic: It’s Time For An Amazon Stock Split)

Amazon stock’s performance

There have been so many articles written about how much someone would have gained if he or she had invested in Amazon at the IPO price, that the “analysis” has become a running joke.

But it does not hurt to revisit the figure once again: 160,850% between 1997 and May 2021. That is: a $1,000 investment in 1997 would have turned into about $1.6 million 24 years later, for an annualized return of 37%.

Below is a graph of Amazon stock’s price action since the IPO, adjusted for the three dot-com era stock splits of 1998 and 1999, compared to the S&P 500 ($SPY) in red and Apple ($AAPL) in green. Immediately after the chart are a few important metrics on Amazon’s shares.

Figure 4: Amazon stock’s price since the IPO

Figure 4: Amazon stock’s price since the IPO

  • Annualized return of 37% has been better than the S&P 500 and Apple by 29 and 4 percentage points, respectively;
  • Annualized volatility of 60%, measured by one standard deviation, means that Amazon stock has been about four times as “jittery” as the S&P 500 since the IPO. However, shares became significantly less volatile in the decade prior to the COVID-19 crisis, as the company matured (see graph below);
  • Fun fact: less than two years after the IPO, Amazon share price had increased nearly sixfold.
  • But maximum peak-to-trough decline of 93% happened shortly thereafter, during the destructive dot-com bubble burst. After bottoming in 2001, Amazon reclaimed all-time highs in 2007.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)