Insights

Is Amazon a Buy After the Stock Split?

On June 6, Amazon (NASDAQ: AMZN) completed a 20-to-1 stock split, bringing its share price to around $100 at the time of this writing. While this change doesn’t reduce the company’s $1.1 trillion market cap, it makes the stock more accessible to investors who might not have thousands to put into the market.

Let’s discuss the pros and cons of investing in the stock today.

First-quarter earnings weren’t as bad as they seem

The ubiquitous online retailer has become a one-stop-shop for everything from electronics to grocery delivery through its brick-and-mortar subsidiary, Whole Foods. Like many companies, Amazon has seen its retail operations come under pressure from inflation, which increases the cost of doing business while potentially eroding consumer purchasing power. Weaker-than-expected first-quarter results have also left many investors wondering if it’s time to jump ship. 

Image source: Getty Images.

Amazon posted a net loss of $3.8 billion in the first quarter, down from an $8.1 billion profit in the prior-year period. While this looks like a shocking deterioration, it isn’t as bad as it looks on the surface. 

Most of Amazon’s bottom line weakness comes from a pre-tax loss of $7.6 billion from its investment in electric automaker Rivian Automotive, which has fallen 66% from its IPO price of $78 per share. Investors should note that Amazon purchased Rivian before its IPO, recording an $11.8 billion noncash gain in the fourth quarter of 2021. So while the loss looks scary, it is unrelated to Amazon’s core business.

Pivoting to new growth drivers

Amazon’s North American e-commerce segment grew revenue by 8% year over year to $69.2 billion in the first quarter. But the flagship business posted a $1.57 billion operating loss because of inflation and supply chain-related challenges. It is unclear when these headwinds will resolve, but Amazon’s massive scale and diversified business model should help it bounce back over the long term. 

Amazon’s cloud computing business, AWS, has already grown to become a dominant force in the company. Revenue in this segment increased 37% year over year to $18.4 billion, with operating income jumping 57% to $6.5 billion.

And cloud computing isn’t the only trick Amazon has up its sleeve. According to Business Insider, Amazon has become the third-biggest digital advertising company behind Alphabet and Meta PlatformsFacebook. The advertising business grew 23% to $7.9 billion in the first quarter. And Amazon’s user base of over 300 million shopping-motivated active users should help it maintain its healthy growth rate. 

Amazon is also pushing into direct-to-consumer streaming with its $8.5 billion acquisition of the MGM film studio. While investors probably shouldn’t expect Amazon to become the next Netflix, MGM’s intellectual property could boost Amazon Prime and help enhance customer satisfaction. Amazon’s subscription services brought in $8.4 billion in first-quarter revenue, up 11% from the prior-year period. 

Inflation is still a massive challenge

With the May inflation rate standing at 8.6% and rising interest rates increasing the cost of capital, this is a challenging time for stock market investors. But while it is difficult to time the bottom, Amazon is a stock to watch. The company’s retail operations will be hit hard by the weak macroeconomic environment, but its massive scale and diversified growth drivers could make it a great way to bet on a rebound. 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., and Netflix. The Motley Fool has a disclosure policy.

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