Amazon has a new share price, but investors' approach should stay the same.
The e-commerce behemoth Amazon (AMZN 5.14 percent) proposed a 20-for-1 stock split in March, and shareholders voted to approve it in May. The separation has finally been official, but what has truly changed?
There are now 20 Amazon shares for every one that existed earlier. As a result, the value of each Amazon share has decreased. Prior to the split, one Amazon share was worth $2,447, therefore reducing that value by 20 yields a new share price of $122.35. However, Amazon's market capitalization has stayed constant at $1.2 trillion, making the stock split purely cosmetic.
Companies like Amazon use this to make their shares more accessible to smaller investors, with the goal that some of these new purchases may expand their shareholder base. But, essentially, the rationale for owning Amazon stock remains unchanged, and here's why.
Finding success in diverse businesses
Jeff Bezos launched Amazon in 1994 with the goal of using the notion of e-commerce to sell books online. His plan was regarded with skepticism, but by 1997, the business had surpassed 1 million users and decided to go public on the Nasdaq, a tech-focused stock exchange. It is presently the world's largest internet retailer.
However, Amazon's success is due to its rapid growth into new areas, which it continues to do today. It has fueled such rapid development that even the world's most famous investor, Warren Buffett, laments not investing in Amazon shares earlier. Beyond e-commerce, the company's Amazon Web Services (AWS) segment, which has become the company's earnings engine, currently leads the entire cloud services market.
It also has an advertising company that, with $31 billion in sales in 2021, outperformed the world's largest video platform, Alphabet's YouTube. Thanks to intriguing assets like Amazon Music and the Amazon Prime streaming platform, which now has exclusive rights to the NFL's Thursday Night Football, the firm has a wonderful chance to develop its ad section. That's not to discount the impact of Amazon's main site, which continues to receive over 2 billion monthly visits.
Amazon, on the other hand, continues to look ahead. It bought a stake in Rivian Automotive, an up-and-coming electric car manufacturer, in 2019, securing a piece of what might be a multi-trillion-dollar sector in the coming decades. However, the Rivian investment has proven to be a double-edged sword, with Amazon's bottom line suffering as a result.
A financial powerhouse
Amazon's operational prowess has undoubtedly benefited its revenues and bottom line. In the previous 12 months, the corporation earned approximately $477 billion in total sales across all of its business groups, and it was also profitable, with profits per share of $41.43.
Investors should reduce the earnings-per-share number by 20 to equal $2.07, putting it in line with the larger number of shares outstanding now that the stock split is in force.
As a contributor to Amazon's profitability, one division, AWS, is punching above its weight. Despite accounting for only 14 percent of Amazon's overall sales last year, the cloud platform provides hundreds of online services ranging from data storage to artificial intelligence, and it is responsible for all of the company's operational profitability. In reality, without AWS, Amazon would have lost money over the period.
AWS revenue surged by 36.5 percent year over year in the first quarter of 2022, outpacing the company's overall revenue, which grew by only 7.3 percent. It indicates that AWS will continue to grow in importance inside Amazon, implying that the corporation will become more lucrative in the long run.
The stock split might be a net positive
If Amazon's stock price drops, a slew of smaller investors may swarm to acquire the shares, helping to boost the company's valuation. This would be especially beneficial in the present market climate, when the Nasdaq-100 index is in a bear market, having lost 25% of its value from its all-time high.
Amazon's stock is doing much worse, having lost 35% in the same time span. Because of rising interest rates and geopolitical uncertainties, which might impact consumer spending, investors are rethinking their growth projections for most technology equities.
However, any effect from the stock split will be transient in nature. Those who invest in Amazon should do so with the idea of owning the stock for five to ten years. After all, since the firm went public in 1997, investors who have held the shares have made 1,630 times their money.
Click here for more trending news