Motley Fool: Growing Amazon will get bigger

For most companies, reaching a market value that exceeds $100 billion means a gradual shift into maturity and a slowing of growth. That’s not the case at Amazon.com (Nasdaq: AMZN), though, despite its recent market value near $465 billion.

How can that be? Well, the e-commerce revolution is just entering its adolescence. E-commerce accounted for only 8.7 percent of the $22 trillion worldwide retail market in 2016. Clearly, there’s plenty of room for Amazon to continue to expand its market share and sales over the long term.

Amazon has been excelling across a broad range of important segments, including e-commerce, cloud computing services, new product hardware (Alexa devices) and original TV shows. Furthermore, it has demonstrated strong revenue growth across its business – revenue in Amazon’s second quarter was up 25 percent year over year. Profits have been slow to appear, as Amazon has invested in growing its business and has competed on price to gain market share, but it’s posting profits now and has been generating free cash flow since the early 2000s.

For patient long-term investors who can stomach some volatility, Amazon remains one of the best large-cap growth stocks around. Its shares can seem overvalued, but throughout the company’s history, it has tended to seem overvalued while continuing to grow. (The Motley Fool owns shares of and has recommended Amazon.com.)

Ask the Fool

Q: Can you explain the “time value of money”? – W.L., Phoenix

A: The time value of money reflects the belief that money received in the future will be worth less than money received today. Most of us would rather get a dollar today than a dollar in 10 years. We could invest it and it would grow to more than a dollar in 10 years. Or we might buy something with it – like a slice of pizza. In 10 years, because of inflation, that slice of pizza will probably cost more.

Stock analysts consider the time value of money when they use fancy “discounted cash flow” analysis to estimate the value of companies. (This is complicated, but useful to know.) They create DCF models for companies they study, estimating how much cash the companies will generate over time. Future earnings are then “discounted” at a rate that can be tricky to determine.

As a simplified example, imagine that Home Surgery Kits Inc. (Ticker: OUCHH) will earn $3 per share next year, and you’re discounting that at 10 percent. Take 1 and add 0.10 (for the 10 percent), getting 1.10. Now divide $3 by 1.10, and you’ll get $2.73. So the “present value” of those future earnings is $2.73.

Q: What are “balanced” mutual funds? – M.R., Butler, Pennsylvania

A: Balanced funds hold both stocks and bonds, offering gains from stock appreciation and stock dividends, as well as income from bond interest. Many fund families offer balanced funds, with varying asset mixes.

You don’t necessarily need a balanced fund, though, as you can always invest in separate stock and bond funds. Consider including some international holdings for diversification. (Many foreign economies are growing much faster than the United States’.)

My dumbest investment

My dumbest investment was in Berkshire Hathaway, which turned out to be a dog, despite many analysts at The Motley Fool and everywhere else fawning over it and its CEO, Warren Buffett.

Well, Buffett is human, and he made a dumb decision when he bought the Precision Castparts company. But its decline started even before then. It’s my fault for buying at the peak. – L.D., online

The Fool responds: You’re right that we and many other stock market enthusiasts like Buffett and his company, Berkshire Hathaway. We admire his terrific investment skills, buying stocks and whole companies (such as Precision Castparts) for Berkshire and racking up average annual gains of more than 20 percent over the past 51 years. We also admire the mix of businesses that Berkshire now encompasses, such as GEICO, Fruit of the Loom, Dairy Queen, See’s Candies, BNSF and Precision Castparts – maker of cast and forged parts for aircraft engines and gas turbines – which are likely to do well over the long run.

We hope you hung on to your shares, as they’re up more than 35 percent since you wrote us two years ago.

Successful investing requires that you know your holdings well and believe in them and that you’re very patient. Great wealth, like Buffett’s, is often built over decades. (The Motley Fool has recommended and owns shares of Berkshire Hathaway.)