Back in March, the e-commerce giant Amazon (AMZN 4.30%) It announced it would conduct a 20-for-1 stock split, and in May, shareholders voted to approve it. The split is now officially in effect, but what has really changed?
For every Amazon share that existed before, 20 took its place. In contrast, the price of each Amazon stock has shrunk proportionately. One Amazon share traded at $2,447 last Friday before the split, so dividing that number by 20 means the new share price is $122.35. But Amazon’s market cap has remained the same, at $1.2 trillion, making the stock’s split entirely cosmetic.
Companies like Amazon do this because they make their stock more accessible to smaller investors, and the hope is that their shareholder base will expand with some of these new buyers. But basically, the case for buying stock on Amazon remains exactly the same, and that’s what it is.
Finding Success in Diversified Business
Amazon was founded in 1994 by Jeff Bezos, who set out to leverage a concept called e-commerce to sell books online. His idea was met with a lot of skepticism, but by 1997 the company had more than a million customers and chose to publicly include it in technology-focused products. Nasdaq. It is now the largest online seller in the world.
But Amazon owes its success to its aggressive expansion into new markets, a strategy it still pursues today. It led to growth so fast that even the world’s most famous investor, Warren Buffett, regretted not buying Amazon stock in the early days. In addition to e-commerce, the company now leads the entire cloud services industry with its Amazon Web Services (AWS) division, which has become the company’s profit engine.
It also boasts advertising activity that outperforms the world’s largest video platform, the alphabetYouTube, to generate revenue in 2021 of $31 billion. The company has a huge opportunity to grow its advertising sector thanks to its exciting assets like Amazon Music and streaming platform Amazon Prime, which now owns the exclusive rights to Thursday football in the NFL. This does not mean ignoring the contribution from the main Amazon site, which still generates more than two billion visits per month.
But Amazon continues to look ahead. In 2019, it bought a stake in the emerging electric car maker Rivian Cars, capturing a portion of what could be a multibillion dollar industry in the coming decades. Rivian’s investment has been a double-edged sword so far, although it has caused volatile results for Amazon’s profit.
Amazon’s operational success certainly flows into its sales and bottom line. The company generated more than $477 billion in total revenue in the past 12 months across all of its business units and has been well profitable for the period, with earnings per share of $41.43.
Although the stock split is now in effect, investors must divide the earnings per share number by 20 to equal $2.07, putting it in line with the greater number of shares outstanding.
One sector, AWS, is overweight as a contributor to Amazon’s profits. The cloud platform offers its customers hundreds of online services from data storage to artificial intelligence, and although it only accounted for 14% of Amazon’s total revenue last year, it is responsible for all of its operating income. In fact, without AWS, Amazon would have incurred an operating loss for this period.
As AWS revenue jumped 36.5% year-over-year in the last first quarter of 2022, it surpassed the company’s total revenue, which increased only 7.3%. This means that AWS continues to become a larger part of Amazon, which indicates that the company could become more profitable overall over time.
The stock split may be net positive
If the drop in Amazon’s stock price leads to a flock of small investors to buy the shares, it could help lift the company’s valuation. This will be especially useful in the current market environment where Nasdaq 100 The index is trading in a bear market, having fallen 25% from its all-time high.
Amazon stock has performed worse with a 35% loss over a similar period. Investors are currently reconsidering their growth forecasts across most technology stocks due to higher interest rates and geopolitical tensions, which could hurt consumer spending.
But regardless, any effect from the stock split will be short-term in nature. Investors who jump into Amazon should do so with the intention of holding it for five to 10 years. After all, investors who have held the stock since the company went public in 1997 have earned 1,630 times their money.