5 reasons to buy Amazon before its stock split

Amazon (NASDAQ: AMZN) shareholders will vote on completing a 20-for-1 stock split at its annual meeting later this month. The move is highly likely to be approved, paving the way for the split to be finalized in June.

Splitting the stock into smaller, easier-to-buy shares could make investing in the company much more attractive to more investors and help increase trading volume. These dynamics have already contributed to power gains for other companies, and it is not unreasonable to think that they could create bullish catalysts for Amazon. However, there are at least five best reasons to buy the company’s stock ahead of the upcoming split.

Image source: Getty Images.

1. Amazon is cheaper than it has been in years

Amazon shares took a big hit after the company’s recent first-quarter earnings release. Due to Amazon’s big investment in an electric vehicle company Rivian, the tech giant ended up posting a loss of $7.56 per share last quarter. First-quarter revenue was also slightly below analysts’ average target, and earnings per share would have been below market expectations, even if it weren’t for the negative impact of the stock price drop. of Rivian’s stock.

AMZN PS Ratio Chart

AMZN PS Ratio data by YCharts.

While Amazon faces headwinds and posted market-disappointing performance in the first quarter, the upside for investors is that the stock hasn’t looked this cheap in years. Recent sales and earnings performance, difficult environments for certain key segments and the company’s investment initiatives have created the perfect storm to shake investor confidence.

In short, Amazon is spending big to help fuel its long-term expansion at a time when sales growth is slowing due to declining tailwinds brought on by the pandemic. It also causes profits to head in the wrong direction.

With risk factors including high inflation and interest rate hikes forcing investors to pull out of stocks, it’s not hard to see why the market hated Amazon’s first-quarter results. and the stock is now down about 33% from its peak last year. On the other hand, this is a company that still looks remarkably well positioned to win going forward, and the big sales have created a great buying opportunity.

2. Cloud activity seems incredibly strong

While the e-commerce business remains Amazon’s main sales driver, the company’s cloud services segment plays a much larger role in driving profits. Amazon Web Services (AWS) grew sales 36.5% year-over-year in the first quarter and posted a gross margin of 35.3%, a substantial improvement over gross margin of about 30% that it posted for the whole of last year.

Due to high infrastructure and operating costs, e-commerce tends to be a relatively low-margin business. Meanwhile, as AWS shows, cloud infrastructure services can be extremely profitable at scale. AWS provides the backbone for a large cross-section of the modern Internet, and Amazon should continue to benefit from more sites, services and applications coming online.

AWS accounted for just 10% of overall revenue last quarter and contributed about $6.2 billion in operating profit, pushing the company to an operating profit of about $3.67 billion. dollars despite substantial losses in other segments. Amazon’s main revenue engine remains in great shape, and it would be a mistake to overlook the bigger picture due to short-term turbulence for other segments.

3. E-commerce still has room for strong growth

Shelter-in-place and social distancing conditions have created growing demand for Amazon’s online retail business. With that tailwind now receding, the company is also facing rising costs due to inflation, high shipping costs and its own massive push in infrastructure and technology spending. The combination of these factors paints an undesirable picture: anemic growth and exploding spending.

However, the short-term picture masks the fact that Amazon’s e-commerce business remains positioned to deliver strong long-term performance. Even amid a high pandemic, e-commerce accounted for just 13.2% of overall US retail spending last year and has plenty of room for expansion. Amazon retains a leading position in the online retail market, and its massive investments to cement its dominance in the space will likely have huge long-term payoffs.

A room full of packages of different sizes.

Image source: Getty Images.

4. Amazon is a fantastic innovator

Between e-commerce and cloud services, Amazon has shaped two of the most influential industries in the world. The company has also used its strengths in online retail and data analytics to rapidly gain market share in the digital advertising space.

While the advertising business’s sales of approximately $7.9 billion were below analysts’ average estimate for sales of $8.2 billion, the unit still managed to increase sales by 25% year over year. Given that US gross domestic product unexpectedly contracted by 1.4% in the quarter, this performance looks pretty good.

Digital advertising is emerging as a new business mainstay, but the company is hardly resting on its laurels. Amazon continues its growth initiatives in categories such as artificial intelligence, robotics and autonomous vehicles, and the company is likely to continue to shape influential trends in technology and services over the next decade. and beyond.

5. The company bets its own stock is cheap

When Amazon announced plans to conduct a 20-for-1 stock split in March, it also announced that its board had authorized $10 billion in stock buybacks. While stock buybacks have the effect of increasing earnings per share by reducing the total number of shares outstanding, buybacks are sometimes seen as an admission that a company cannot find better ways to use funds to stimulate growth.

Given that Amazon continues to invest heavily in technology, infrastructure, and research and development, the concerns that sometimes accompany stock buybacks don’t seem applicable here. The company’s management team saw an attractive opportunity to buy back stock even before recent selloffs made the stock even cheaper, and long-term investors should take the opportunity to buy some of that. big business at a great price.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Keith Noonan has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

James T. Quintero