Key Points
- Amazon has been among the most successful growth stocks over the last 20 years.
- The company is synonymous with e-commerce and has a strong web service presence.
- Despite its history, Amazon now has more blue-chip stock qualities than growth stock qualities.
- 5 stocks we like better than Amazon.com
Investing in blue chip stocks has been a tried and true method of wealth creation for American investors for more than a century. But when you think of blue chip stocks, you usually think of long-standing financial or industrial companies like JPMorgan Chase NYSE: JPM or Caterpillar Inc. NYSE: CAT. But not every company must have a century-long business history to be considered a blue chip.
For example, is Amazon Inc NASDAQ: AMZN a blue chip stock? That's the question we'll debate in this article, and the answer may surprise you.
Defining blue-chip stocks
"Blue chip stock" isn't a term you can narrow down to specific qualities. Instead, blue chip status is something a company earns over time by proving its stability to investors. Not everyone is interested in blue chips since they tend to underperform growth stocks over long time horizons. Still, investors who value security and reliability over maximum returns can benefit from blue chip stocks.
Blue chips are among some of the safest and most secure stocks available compared to the whole market. While losses are inevitable in any investment, blue chips tend to suffer less than their peers in down markets and usually rebound with strength when markets stabilize. Blue chip stocks come from different sectors and industries, but they all share some similarities: large market caps, liquid shares, strong balance sheets and positive brand recognition. Here are a few blue chip stock examples across different sectors:
- Financials: JP Morgan Chase and Co. NYSE: JPM, Goldman Sachs Group Inc. NYSE: GS, Visa Inc. NYSE: V, American Express Company NYSE: AXP
- Healthcare: UnitedHealth Group Inc. NYSE: UNH, Merck and Co. Inc. NYSE: MRK, Johnson and Johnson NYSE: JNJ, Amgen Inc. NYSE: AMGN
- Technology: Apple Inc. NASDAQ: AAPL, Microsoft Inc. NASDAQ: MSFT, Intel Corp. NASDAQ: INTC
- Industrials: Boeing Co. NYSE: BA, Caterpillar Inc. NYSE: CAT, Lockheed Martin Corp. NYSE: LMT
- Consumer discretionary: Starbucks Corp. NASDAQ: SBUX, McDonald’s Corp. NYSE: MCD, Walmart Inc. NYSE: WMT, Walt Disney Co. NYSE: DIS
Overview of Amazon.com
Today, you can find any product under the sun in Amazon's vast catalog. However, in the beginning, Amazon sold a single item — books! Founder and (now former) CEO Jeff Bezos created Amazon in his garage in 1994, and while he had a broad vision of becoming an online retail giant, he started with books for several reasons.
First, books are easy to acquire, store and ship. In the 1990s, e-commerce was a niche industry, and consumers were apprehensive about placing personal information online and receiving items. Books were easy items to package, and the risk of damage in transit was minimal. In addition, the public at the time wasn't interested in receiving electronics, clothes and other household items through mail or delivery.
Second, the global catalog of published books is far greater than anything a brick-and-mortar bookstore could hold. An internet bookseller was the ideal marketplace since the company could acquire and sell any text in any language. Bezos later expanded to music by selling CDs, video games, computer software and other consumer products. The company went public in 1997, surviving the dotcom crash and flourishing as an e-commerce leader in the succeeding years.
Amazon total returns since inception
Today, Amazon isn't just an e-commerce behemoth. Bezos launched Amazon Web Services in 2004, which offers cloud computing services to individuals, companies and governments alike. AWS earnings represent a substantial portion of the company's overall profits. Additionally, Amazon owns Whole Foods Markets, Twitch, Audible and Ring. While not every acquisition has been a winner, Amazon has added tremendous value to its portfolio over the last 10 to 15 years, and shareholders have been greatly rewarded.
Amazon's common stock has split four times since the company went public in 1997. The first three splits occurred during 15 months in 1998 and 1999. After 1999, Amazon went more than 20 years without a stock split. The fourth and final stock split occurred in June 2022; the company split shares 20-1 instead of 2-1 or 3-1 like previous splits.
Amazon reached an all-time high of $3,507 in July 2021, which adjusted for the June 2022 split would be $186. If you held Amazon stock since inception and sold at the all-time high, you’d have netted yourself a 54,000% return — not bad for less than three decades of work. Amazon is now one of the largest companies in the world and should be considered a blue chip firm, but blue chip status means that meteoric 54,000% returns are unlikely to be repeated in the future.
Amazon's financial performance
Amazon was one of the few companies that saw their profits increase during the height of the COVID-19 pandemic. In 2019, Amazon took in just over $280 billion in annual operating revenue. In 2020 and 2021, that number increased to $386 billion and $470 billion, respectively.
Not only that, but Amazon became more efficient over that stretch: cost of revenue declined from 60% in 2020 to 56% by 2022. The company has also beaten earnings expectations for three consecutive quarters.
Market dominance and competitive advantage
Amazon has an extensive reach and has become synonymous with e-commerce. Amazon has captured a remarkable 37.6% market share of the e-commerce sector in 2023, which is head and shoulders above the rest of the online competition. Walmart Inc. is second with a market share of 6.4%, and Apple Inc. is third at 3.6%. With hundreds of millions of Amazon Prime customers around the world, the company’s dominance in e-commerce shows little sign of slowing.
Risk factors and challenges
What headwinds could Amazon face in the coming years? While e-commerce might be what Amazon is most known for, company management still acts like a tech sector firm when it comes to research and development. Amazon retains no earnings and has P/E ratio north of 75. And despite its storied history, Amazon is still a relative newcomer to blue-chip land and has never operated in a rising interest-rate environment. Can a company with three times as much debt as cash on hand continue to grow with interest rates this high?
Amazon's long-term growth prospects
Amazon shares have enjoyed a healthy 2023 bull run, and it's hard to see a competitor challenging its e-commerce dominance anytime soon. The company is expanding its footprint in Europe with new warehouses but also announced job cuts in its Alexa division in order to put more resources into generative artificial intelligence research.
E-commerce revenue is expected to grow 10% annually through 2028, with total user penetration growing from 43% to 52%. Considering Amazon's other ventures like Web Services, Ring and streaming platforms, the company could be "primed" for even more growth.
Investor sentiment and analyst opinions
Amazon is one of the most covered stocks in financial media, so plenty of analysis goes into their projections and price targets. Based on 45 ratings, Amazon is currently labeled as a "moderate buy" with an average price target of $168.93, representing an upside of more than 16% over the current market price. The highest price target is $230, and the lowest is $116. Analysts project the stock to outperform both the retail sector and the S&P 500 overall.
Dividend policy and shareholder returns
Amazon doesn’t pay a dividend and never has. Unlike many blue chip stocks that focus on returning capital to shareholders, Amazon still has a growth mindset and plows most of its profits back into the firm.
While the stock gains have been phenomenal, AMZN shares have a beta of 1.17, which means the stock is only 17% more volatile than the overall market. The stock also has strong demand from institutional investors.
Reasons Amazon is a blue-chip stock
Amazon has become one of the world's largest and most recognizable companies and should be considered for blue chip investing. One knock against Amazon as a blue chip is the lack of dividends; however, a dividend isn't necessarily required for blue chip recognition.
Dividends can play a significant role when investing in older blue chip firms, but Amazon is still less than 30 years old and still retains a large amount of profit for research and development.
Reason 1: Large market capitalization
One characteristic that all blue chip stocks have is a large market cap. The stock market is a machine where investors vote with their money, and companies with large market caps don't spring up overnight. A large market cap shows that demand for shares is consistently high, and the company has a solid financial base to fall back on. As of this writing, Amazon is one of the three largest U.S. companies in the world by market capitalization.
Reason 2: Industry leader
Amazon may have started in a dusty garage, but today, the name is synonymous with e-commerce. Amazon Prime, the company's upgrade membership service, boasts over 200 million global subscribers. Of those subscribers, over 60% reported shopping on Amazon at least once a month. Additionally, Amazon Web Services is an industry leader in cloud computing and API services.
Reason 3: Successful business history
Few companies have raised their profile more over the last 30 years than Amazon. The company consistently beats earnings estimates and revenue has grown tremendously, especially in the last 10 years.
Amazon shareholders have been rewarded handsomely and the company continues to expand into new markets and industries (although it remains to be seen how well the company can perform now that its heart and soul, CEO Jeff Bezos, has retired).
Reason 4: Trades on major exchanges
Blue-chip companies are large conglomerates with popular stocks, which means trading on a major exchange is a must. Amazon trades on the NASDAQ exchange in the United States and it's one of the largest members of the S&P 500.
Reason 5: High liquidity / low volatility
There was a time when Amazon was a volatile growth stock, but the growth story faded a bit as Amazon matured as a company. Shares still carry a higher beta (1.3) than the overall market, but Amazon’s place in the tech and consumer discretionary sectors make it inherently more volatile than consumer staples or bank stocks. This low volatility combines with Amazon’s ample liquidity to create a blue ship stock worth owning for the long haul.
Why consider investing in Amazon?
Blue chip firms are held in high regard in capital markets. These companies have stood tall in the face of bear markets, recessions or even economic disasters like the 2008 financial crisis. Of course, a blue-chip investment isn't going to go straight up every day.
Plenty of solid companies have gone through extended bear markets, and you can't diversify market risk away just by building a sturdy portfolio of blue chips. Amazon isn't your typical blue-chip either: it has a high P/E ratio, doesn't pay a dividend and has a heavy focus on growth into new industries (so don't expect a high dividend yield anytime soon).
Whether you're searching for blue chips at 52-week lows or buying them based on momentum, an investment in America's largest and most stable companies has almost always produced quality risk-adjusted returns over long time frames. Amazon has provided tremendous rewards to its early investors, and while it remains more volatile than stocks in sectors like consumer staples or finance. Plus, investors who wish to still hold equities in retirement can sleep easy at night knowing their capital is invested in blue chips and not volatile startups.
Amazon has shed its growth label and entered blue-chip territory
By nearly all standards and classifications, Amazon is a blue-chip stock. Gone are the days of volatile drawdowns and parabolic gains; the stock certainly isn't at risk of dropping 90% anymore, but the 200% and 300% years are probably in the past. Slow and steady may not excite previous shareholders who saw their investment balloon over the last decade, but Amazon is here to stay.
Amazon has a massive market cap, nearly universal brand recognition and the balance sheet strength to remain a force for decades to come. The company might not yet pay a dividend, but this is the only mark against its blue-chip status. Consider Amazon as you would other tech giants like Apple and Microsoft — even if their stocks are more volatile than blue chips in other industries, they deserve consideration when looking for blue-chip stocks to invest in.
Before you consider Amazon.com, you'll want to hear this.
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While Amazon.com currently has a "Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.
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