How to profit from Amazon’s unstoppable rise to US$1,000 per share

Overnight on the tech-heavy NASDAQ stock exchange shares in online U.S. retailer Amazon Inc. climbed above US$1,000 each for the first time in history, with its heavyweight rival Alphabet Inc as owner of Google just behind at US$997 per share.

If you had bought US$1,000 worth of Amazon shares in 1997 when it largely operated as an online book seller you’re investment would have turned into around US$500,000 today, which demonstrates the power of long-term returns.

However, the big lesson for ASX investors from Amazon’s rise is what companies will offer the best returns going forward.

Thanks to the tax free nature of many dividend payments in Australia many investors are focused on earning the highest income streams possible, which is all well good, until you appreciate the power of compounding returns.

Companies such as Telstra Corporation Ltd (ASX: TLS) for example will payout pretty much all of their profits (or sometimes more) in dividends to shareholders which means there’s no spare cash leftover to re-invest for growth.

Partly as a result of this policy Telstra shares are down 9% over the last 10 years as its debt profile ballooned, yet it remains surprisingly popular with dividend seekers because it’s considered a “safe” bet.

By contrast Amazon’s founder and CEO is famous for his belief in re-investing the company’s free cash flow to grow the business bigger at the expense of dividends.

The company has never paid a dividend and “bottom-line profits” are considered irrelevant compared to the growth of free cash flow per share, which is the”profit” to be re-invested directly into new growth projects or growth-generating research and development projects.

In effect, Amazon’s modus operandi is to attack any business (commonly by leveraging the internet) not innovating or heavily re-investing in itself, which means retailers in Australia like Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES) or Myer Holdings Ltd (ASX: MYR) could face big trouble unless they lift their game.

It’s not just the retail sector Amazon has been attacking, as its Amazon Web Services (AWS) business that allows companies to store their data online (in the cloud) is now a world leader and delivering compound revenue growth greater than 40% a year thanks to Bezos’s vision to place free cash flow growth and re-investment before earnings (bottom-line profit) and dividends per share.

While Amazon shows how Australia’s retail sector could be disrupted over the next 5 years or so on the other side of the coin is the opportunity for growth-oriented ASX investors to identify businesses that are following the Amazon textbook of innovation and re-investment.

Admittedly, this is a hard task, but one business re-investing heavily in itself (including by subscribing to AWS) to turn into a potential capital compounding machine is cloud-accounting provider XERO FPO NZ (ASX: XRO).

I have covered its growth potential multiple times over the last couple of weeks and continue to believe the stock is a buy at $23.25 today, although as a loss-maker it remains higher up the risk scale, for now anyway.

If you want to learn about some dividend shares to give your portfolio some balance away from the tech superstars, here are 5 of our favorite dividend payers now.

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Motley Fool contributor Tom Richardson owns shares of Amazon, Alphabet Inc. & Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Xero, Wesfarmers and Telstra. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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