Amazon: A Strong Foundation for Your Long-Term Portfolio

Investing your life savings in a single stock is not advisable. Instead, a diversified portfolio should form the backbone of your financial strategy. An effective way to achieve diversification is by using a market-tracking exchange-traded fund, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO). Trusting one stock with all your wealth is risky.

That said, Amazon (NASDAQ: AMZN) stands out as a solid cornerstone for a diversified long-term portfolio. The e-commerce and tech giant is well-positioned to thrive for decades, operating across several resilient industries. Additionally, it demonstrates flexibility by exploring new business opportunities as market conditions evolve.

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Amazon: The Everything Store and More

Amazon’s innovation lineage is remarkable. Founder Jeff Bezos launched one of the first successful e-commerce platforms, starting as a bookstore and expanding into various sectors, including music, videos, consumer electronics, and home goods. Today, consumers can shop for anything from dish sponges to vehicles on Amazon.com.

The core of Amazon’s business is its diverse e-commerce network. In 2024, the company’s domestic and international retail operations generated $530 billion in revenues, leading to $28.8 billion in operating income. Notably, Amazon has seen success with its line of in-house products, including the Echo and Fire devices, as well as Amazon Basics items like batteries and gloves. The company also benefits from products added through third-party distributors and the expansive Amazon Marketplace, which provides a reliable shopping experience.

Another significant element of Amazon’s portfolio is Amazon Web Services (AWS). Initially focused on cloud computing, AWS has broadened its scope to include AI services, high-speed databases, and Amazon’s semiconductor designs. In 2024, AWS generated $108 billion in net sales, contributing to the majority of Amazon’s $39.8 billion in operating profits.

Why Amazon Isn’t a One-Stop Investment Solution

Amazon’s various business sectors allow it to absorb risks and invest significantly in infrastructure. However, the company ultimately relies on just two main operations, which limits its ability to weather global economic fluctuations.

For instance, during the pandemic in 2020, Amazon’s free cash flow surged but saw a steep decline in 2022. The company faced challenges from rising inflation and waning consumer confidence. Even more diversified entities, like Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), experienced smaller impacts due to their broad range of essential services, including consumer staples and transportation.

While Amazon is diversified, it cannot fully compete with Berkshire Hathaway or a well-constructed index fund in terms of risk mitigation.

Image source: Getty Images.

How to Approach Amazon’s Stock

Amazon has proven to be both successful and adaptable in an ever-evolving market. It has been a valuable part of my portfolio since 2017, and I wish I had invested sooner. To me, Amazon’s stock is a solid addition to a long-term investment strategy.

However, I wouldn’t rely solely on Amazon stock. Given the current economic uncertainty, now might not be the ideal time for a significant investment in the stock. Past downturns, like those in 2022, suggest investors could face more volatility.

If you’re considering adding Amazon to your stock portfolio, a gradual approach is wise. Utilizing dollar-cost averaging can help you build your position over time, especially in a fluctuating market. This method allows you to buy more shares when prices are lower, setting a solid foundation for long-term growth.

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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. Anders Bylund has positions in Amazon and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.