This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
It's no secret that buying and holding shares of high-growth companies can help you earn outstanding returns in the stock market. This approach usually requires you to spread your portfolio across many stocks to protect yourself in the event a company fails to live up to expectations.
However, in recent years, the most dominant and profitable tech companies in the world have also been some of the best growth stocks to buy and hold for wealth-building returns. Their vast resources and leading technology have fostered innovation in emerging opportunities like artificial intelligence (AI) and robotics.
With that in mind, the stock I would consider buying for the next five years is Amazon (NASDAQ: AMZN).
Why take chances on up-and-comers when you can beat the S&P 500 with Amazon?
If you look at Amazon's most recent quarterly sales growth, it's not impressive. Growth for its largest business, e-commerce, has slowed in recent years, bringing Amazon's total sales growth in Q1 to just 9% over the year-ago quarter. The stock has even underperformed the S&P 500 over the last five years, but it's easier to see where Amazon is headed by looking at its performance since 2022, when shares have more than doubled. There are good reasons why Amazon can continue climbing through 2030 and outperform the market.
First, the company is still delivering double-digit growth in businesses that generate high margins and fuel strong earnings. The billions of people visiting Amazon.com every month are turning into a lucrative opportunity in advertising. Revenue from advertising services grew 19% year over year last quarter, generating $58.3 billion of high-margin revenue for Amazon over the last year.
Amazon Web Services (AWS) is the leading enterprise cloud services provider. Custom AI chips and cutting-edge tools are helping client companies develop and build AI applications, driving incredible growth. AWS generated $111.8 billion in trailing-12-month revenue and grew 17% year over year last quarter.
Strong growth from advertising, cloud computing, and other non-retail services is improving Amazon's overall margin profile, which will be a key catalyst for market-beating returns over the next five years. But this is only part of the reason why Amazon's earnings jumped 62% last quarter.
Is robotics Amazon's next monster growth opportunity?
Amazon's more than 200 million Prime members may not realize many of their recent orders were picked and handled in a warehouse by a robot. While Amazon still employs thousands of humans, it has rolled out over 750,000 robots across its fulfillment centers since 2012. This is playing a key role in lowering costs and speeding up order processing in the retail segment.
The company is just getting started with robots too. As AI technology advances, so do the types of robots Amazon can use. Its Vulcan robot can sense the exact level of pressure to apply to an item to avoid damaging it. The arrival of humanoid robots that can walk and use synthetic hands for more intricate tasks could significantly increase productivity and lower costs for Amazon in the next decade or so.
Amazon has been testing its most advanced robotics technologies in its new fulfillment center in Shreveport, Louisiana. Management noted earlier this year that it was very encouraged by what they were seeing in terms of improving speed, lowering costs, and increasing efficiency. As these improvements roll out to more facilities, investors should see Amazon continue to expand its profit margins.
That said, investors shouldn't expect Amazon's earnings to grow in a straight line since it is also investing heavily in data centers and other infrastructure to support growth across its business, and such spending could result in lumpy profitability. But analysts currently expect Amazon's earnings to grow 16% annually over the next several years.
A leading tech stock at a reasonable valuation
Whether you look at price to sales, price to cash flow, or price to earnings, Amazon continues to trade within its historical valuation range and well below peak levels from the past few years. This suggest that investors may be overlooking Amazon's opportunity in areas like robotics, given how rapidly AI is advancing.
With this wide-moat business combining strong growth in high-margin businesses like advertising and cloud services with an improving cost structure thanks to AI and robotics, Amazon is a no-brainer stock to buy and hold for the next five years and more.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
