If you have $3,000, should you spend it on 1 share of Amazon? It depends on your current portfolio.
Even seasoned investors make mistakes at times. But when you start investing, you're prone to letting your emotions take over. Wochit
Amazon (NASDAQ: AMZN) stock looks expensive today, trading at more than $3,000 for one share. That's enough money to buy about 15 shares of PayPal, 20 shares of Walt Disney, 26 shares of Apple, or 58 shares of Coca-Cola. Where should you put your money?
It's not about the price
While $3,000 seems like a hefty price for one share of stock, the number of shares you buy isn't what really matters. For example, Apple executed a 4-for-1 stock split in August. For each share worth about $500, shareholders received four shares worth about $125 each. While it may be easier to purchase shares that cost less, if you had $500 to invest in Apple, it didn't matter if you bought one share before the split or four shares after – it was worth the same amount of money and had the same growth prospects over time.
Investing apps make it easy for beginners: you can buy fractional shares. But if you do have that much money to spend, the fact that you'd be buying one share as opposed to several shouldn't deter you.
Why not Amazon?
One reason to look elsewhere would be diversification, or put simply, not putting all of your eggs in one basket. If all of your money is in one stock, your risk of losing it is heightened. Diversifying your stock portfolio, or holding a range of stocks in different industries, hedges the risk of any of them underperforming. It also gives your money more ways to work for you.
Beginning investors can get blinded by hype, and putting a lot of money into a high-growth company may seem enticing. But a mixture of high growth and value stocks, or low- and high-risk stocks, is a better way to succeed as an investor.
However, if you already own a range of stocks, adding $3,000 to own a position in Amazon could further diversify your holdings.
Building wealth through investing is all about buying into great companies. Amazon is a well-run company with excellent prospects that dominates online retail and always seems to have something new up its sleeve. Its ability to take chances is a hallmark of innovation and a reason why it comes out on top, despite sometimes failing.
Amazon now accounts for almost 40% of all online sales in the U.S., according to Statista. That massive scale would make it challenging for anyone else to catch up. Rival Walmart still has higher total sales, with $135 billion in third-quarter revenue versus Amazon's $96 billion, but Amazon remains the clear leader in e-commerce. The two behemoth retailers are both trying to get into each other's territory, with Walmart expanding its online options and Amazon trying to make a name for itself in storefront retail.
Amazon's sales grew 37% in the third quarter. It's expecting similar or slightly less growth in the fourth quarter, and it's not slowing down anytime soon. Amazon has gone on another hiring spree this year to meet demand, the Amazon Web Services division is growing fast as well, and its Amazon Fresh and Go grocery stores are expanding the company's brick-and-mortar foothold.
Price and valuation
While $3,000 sounds expensive, it's actually not so costly relative to sales and earnings. Amazon's earnings tripled in the third quarter, bringing down a typically lofty valuation to about 94 times trailing-12-month earnings.
Amazon stock is up 73% year to date, as the pandemic sent more and more shoppers online and Amazon rose to the occasion. If you would think of putting $3,000 into any one company, buying one share of Amazon is an excellent choice.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, PayPal Holdings, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, and short January 2021 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
Offer from the Motley Fool: 10 stocks we like better than Amazon
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Amazon wasn't one of them! That's right – they think these 10 stocks are even better buys.
See the 10 stocks
*Stock Advisor returns as of November 20, 2020