It’s official: Amazon (AMZN -1.48%) just executed its first stock split since 1999.
On Monday, the e-commerce giant gave investors 20 shares for each one they previously held, and consequently, the individual share price plunged. After years of the stock trading in the $1,000 range, it looks odd to see Amazon shares going for just around $120. But while the price of an individual Amazon share is much lower than it was last week, investors shouldn’t be fooled. The stock isn’t any cheaper than it was, and the value proposition is the same as it was last week before the split was announced.
Though the stock split itself doesn’t really matter, there are a number of great reasons to buy Amazon stock now. Let’s take a look at a few.
1. The stock is cheap
Amazon stock isn’t cheap because of the stock split. It’s cheap because it’s trading down a third from its peak last fall, and its earnings potential is as strong as ever.
That said, the company’s generally accepted accounting principles (GAAP) earnings were marred last quarter by a plunge in the value of Rivian, the electric vehicle maker that Amazon has invested in. That was purely a paper loss, based on a mark-to-market method of accounting, which led the company to post a loss in the first quarter. Based on 2021 earnings per share, however, Amazon is trading at a price-to-earnings ratio of just 37.8, about the cheapest it’s ever been based on that metric.
In May, Amazon actually fell below where it was trading in February 2020 before the pandemic. In other words, the market seems to think that all the gains the company made in the last two years aren’t even worth anything. That’s a mistake.
2. The e-commerce business will recover
The first quarter was an ugly one for e-commerce. In Amazon’s North American segment, revenue grew just 8%, and the company posted a $1.6 billion operating loss compared to an operating profit of $3.5 billion in the quarter a year ago. That business segment isn’t just e-commerce. It includes the high-margin advertising business, meaning that North American e-commerce losses were likely even worse than $1.6 billion.
The international segment was just as discouraging. Revenue actually fell 6%, or was flat in currency-neutral terms, leading to an operating loss of $1.3 billion, which compares to a segment operating profit of $1.3 billion in the quarter a year ago.
Amazon is facing a number of e-commerce headwinds. Rising fuel prices have contributed to higher transportation costs, which explains in part why shipping costs rose 14% even as units shipped were flat. The company also overexpanded capacity during the pandemic and is now subleasing excess space, but it should eventually grow into that capacity.
The e-commerce sector, in general, was also facing difficult comparisons in the first quarter as Q1 2021 was the last full period before COVID-19 vaccines were available to the public. This was also a time when Americans also got stimulus checks. So e-commerce performance should improve over the year, even though Amazon may continue to lose money this year due to overcapacity.
3. AWS is still a juggernaut
Amazon’s biggest profit contributor is also its most reliable, and it shows no signs of slowing down.
Amazon Web Services (AWS), its cloud infrastructure unit, posted 37% revenue growth in the first quarter to $18.4 billion and currency-neutral operating income growth of 53% to $6.5 billion. That gives AWS a 35% operating margin. Despite competition from Microsoft and Alphabet, Amazon is still the top dog in cloud infrastructure, and it looks set to remain that way based on its growth rate and profitability.
AWS continues to expand into new products and services such as Amplify Studio and is attracting customers like Boeing, Telefonica, and the owner of the Toronto Maple Leafs hockey team. AWS architect Andy Jassy replaced Jeff Bezos as CEO, showing the importance of the cloud infrastructure business, and some see the addressable market for the cloud infrastructure systems reaching multi-trillion-dollar levels.
On the earnings call, management said that the AWS backlog was up 68% to $88.9 billion, a clear sign of strong upcoming growth. CFO Brian Olsavsky expressed confidence in the business, saying, “For full year 2022, we do expect infrastructure spend to grow year over year, in large part to support the rapid growth and innovation we’re seeing within AWS.” Some investors have even argued that AWS alone can justify Amazon’s valuation.
2022 is still likely to be a tough year for Amazon, and second-quarter guidance was not encouraging, as the company called for 3% to 7% revenue growth, a bottom-line result between an operating loss of $1 billion, and an operating profit of $3 billion.
Still, the company’s myriad competitive advantages aren’t going anywhere, and the business should improve as it grows into excess logistics capacity and the economy eventually stabilizes.
Stock split or not, now looks like a great time to take advantage of the discount on this top company.
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