Amazon: A Masterclass in Business Diversification

When we first purchased Amazon back in March 2023, it wasn't just about buying into the world's largest e-commerce platform. We were investing in what we saw as one of the most diversified, cash-generating businesses in the modern economy. Nearly two and a half years later, our investment has grown by 116% and our thesis has only gotten stronger, even as the company navigates some near-term challenges.

The "Do You Use It?" Test

One of our fundamental investment principles is simple: do you use the product or service? With Amazon, that answer is almost universally yes. As Bill noted in our recent podcast discussion, "Amazon is one of those companies that I feel like everybody uses in some capacity. It would be more rare to find someone who doesn't use Amazon."

This ubiquity isn't accidental - it's the result of a carefully orchestrated strategy to become embedded in nearly every aspect of consumer and business life. From Prime memberships to AWS cloud services, Amazon has built an ecosystem that's incredibly difficult for customers to leave.

A Revenue Diversification Masterpiece

What makes Amazon particularly compelling is how well-balanced their revenue streams have become. The company's business segments break down as follows:

• Online stores: 38% of revenue (the core e-commerce platform)

• Third-party seller services: 24% of revenue (marketplace fees and services)

• AWS (Amazon Web Services): 17% of revenue (cloud computing services)

• Advertising services: 9% of revenue (growing rapidly)

• Subscription services: 7% of revenue (primarily Prime memberships)

• Physical stores: 3.3% of revenue (mainly Whole Foods)

This diversification is crucial because it creates a perfect balance between high-volume, lower-margin businesses (like retail) and high-margin, recurring revenue streams (like AWS and advertising).

The Margin Story That Matters

The real beauty of Amazon's model becomes apparent when you look at margins. The retail side operates on razor-thin margins - it's essentially a volume game designed to capture market share and customer loyalty. But Amazon also has other business units that operate with tremendous profit margins.

AWS, for instance, operates at dramatically higher margins than retail, as do the advertising and subscription services.

This creates what Bill described as a "Warren Buffett-like" dynamic, where Amazon uses its retail cash generation to fund expansion into higher-margin businesses - much like how Buffett used insurance float to invest in more profitable ventures.

The AI and Cloud Computing Advantage

Amazon's position in artificial intelligence and cloud computing gives them a significant competitive moat. AWS isn't just growing fast (it's the fastest-growing segment) - it's positioned as the backbone of the internet alongside Microsoft and Google. The company's continued investments in data center buildout and AI capabilities should pay dividends for years to come.

The recurring nature of these services is particularly attractive. Unlike retail purchases, cloud services and AI tools create sticky, subscription-like relationships with business customers who are reluctant to switch providers once they're integrated.

Navigating the Tariff Challenge

We'd be ignorant not to address the elephant in the room: tariff uncertainty. Amazon imports goods from around the world, with China being a significant source. The company has expressed some caution in their Q2 guidance due to this uncertainty.

However, this challenge needs to be viewed in context. First, the retail segment - while important for customer acquisition and cash generation - represents just 38% of total revenue. Second, Amazon's scale and logistics expertise give them advantages in managing supply chain disruptions that smaller competitors lack.

Most importantly, the company's diversification means that even if retail margins get squeezed temporarily, the high-margin AWS, advertising, and subscription businesses continue growing. This is exactly why we value companies with multiple revenue streams.

Valuation in Perspective

At a current P/E ratio of 33.4, Amazon isn't cheap by traditional value metrics. But as Eric noted, this is actually low by historical standards - the stock has traded at P/E ratios of 60 or higher in recent years. The lower multiple likely reflects the market's caution around tariff impacts and the company's more mature growth profile.

We're comfortable with this valuation because we're paying for a business that continues to compound wealth through multiple channels. Amazon isn't just an e-commerce company or just a cloud provider - it's a diversified technology conglomerate with unmatched logistics capabilities and customer reach.

The Long-Term Outlook

Looking ahead, Amazon remains uniquely positioned to benefit from several powerful trends: the continued shift to e-commerce, the growth of cloud computing, the expansion of digital advertising, and the development of artificial intelligence. The company's ability to generate massive cash flows gives them the resources to stay ahead of these trends while also entering new markets.

Disclaimer:

This content is for informational purposes only and is not investment advice. Fox Hill Wealth Management is a registered investment adviser. All investing involves risk. Past performance is not a guarantee of future results.