Amazon's diversified business model offers huge opportunities to reinvest capital.
The company's multiple income streams are a hedge against challenging periods.
However, Amazon's size and complexity could now weigh on its future growth.
Amazon(NASDAQ: AMZN) has been a massive wealth creator for investors over the past two decades, making some of its early investors enormously wealthy. If you're considering adding the stock to your portfolio, explore both the bull and bear cases before buying it today.
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What to like about Amazon
Founded as an e-commerce company, Amazon has expanded beyond its roots to become a huge tech conglomerate with interests spanning cloud computing, advertising, logistics, and more. Its diversified business model offers enormous opportunities for the company to play offense and defense.
On the offense side, Amazon's diversified business model allows it to reinvest profits to keep growth coming. For instance, Amazon Web Services (AWS) was initially an infrastructure within the tech company to support the growth of the e-commerce business. Over the years, this segment has become the most profitable business within Amazon. To put it into perspective, AWS accounted for 58% of Amazon's 2024 operating income, which is remarkable if you consider that AWS only accounted for 17% of the total revenue.
Similarly, Amazon quietly built a massive advertising business with revenue of $17.3 billion in the fourth quarter of 2024. While this business was only 9% of Amazon's revenue in that quarter, it is growing more than twice that of the traditional e-commerce business. And while there's no breakdown on profitability, it's easy to see that this type of business is highly profitable.
With these younger ventures growing faster (and more profitable), Amazon can sustain its growth momentum even when e-commerce growth slows down -- which is inevitable given Amazon's size. A diversified revenue base also provides the hedge needed during challenging times, such as the recent tariff war.
While Amazon is already a giant, it is well-positioned to keep growing for a while, leveraging trends like artificial intelligence (AI), robotics, and more. These technological advancements could open up new opportunities for the company, like how the internet enabled e-commerce, cloud computing, and advertising.
With so many resources, such as its solid balance sheet and huge user base, the tech company is just getting started.
What to worry about with Amazon
Amazon is a great company that has delivered incredible returns to investors over the decades. However, past returns do not guarantee future performance, so investors cannot rely on a past growth trajectory to project the future.
Amazon is already one of the biggest companies on the planet. It generated $638 billion in revenue in 2024 (the second-largest company in the U.S. behind just Walmart at $681 billion ) and hired over 1.5 million full- and part-time employees that year. So, while the tech company has grown at high rates in the past, its massive size could impede future growth. In other words, while Amazon's growth machine will likely continue spinning for a while, it's unlikely to spin at its historical rate.
Traditional e-commerce businesses will also likely face challenges due to the recent tariffs. On one level, tariffs will make it more expensive for Amazon (and its third-party sellers) to sell goods to consumers. In particular, those who rely on importing goods from China will see enormous challenges in the coming months.
The uncertainties around tariffs will also make it difficult for merchants to decide on ordering, logistics, pricing, and other related matters. At best, sellers will have to endure challenging adjustments to their supply chain and business model in the coming months to respond to the tariffs. At worst, they could shut down their businesses altogether if they can't find alternative suppliers.
While Amazon's diversified business model offers plenty of benefits, its complexity is becoming a risk that investors should note. Such complexity may mean it simply tries to do too much too fast and falters in key areas. If it fails to prioritize, it may lose its competitive advantage in its core businesses and/or make mistakes in future bets in areas like AI.
In other words, the execution risk is real and rising.
What it means for investors
Amazon is one of the most incredible businesses on the planet, dominating areas like e-commerce and the cloud. And with megatrends like AI and automation still unfolding, Amazon has the scale, capital, and ambition to keep innovating for years.
The downside is that Amazon's size is becoming its enemy, leading to risks like slower growth rates and execution problems. And with the ongoing tariff war, there are real risks that the e-commerce business may not be as attractive as it was in the past.
In short, while Amazon's prospects remain bright, investors should not expect a smooth ride ahead.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
