Amazon (NASDAQ: AMZN) may be a household word for many of us. That’s because of the company’s status as an e-commerce giant. We turn to Amazon for anything from groceries to general merchandise. But Amazon has also been much talked about in the investment community these days. That’s because the company recently completed a stock split.
The split doesn’t change the company’s market value. But it does lower the value of each individual share as the company issues additional ones to current investors. Amazon is now trading for about $120 after trading for more than $2,000 a share prior to the operation. Is this a reason for Amazon to grab our attention? Or is there another reason to be talking about this stock? Let’s find out.
A broader range of investors
The stock split makes it easier for a broader range of investors to buy Amazon — without turning to fractional shares. That’s positive. But this won’t have an effect on the company’s share price over time. What will affect the share price is the health of Amazon’s e-commerce and cloud computing businesses.
Right now, e-commerce isn’t at its best. The good news is that this isn’t due to internal factors. Instead, it’s due to problems that are external. And here’s more good news — the problems should be temporary. I’m talking about higher inflation and supply chain issues. Amazon said they weighed on earnings in the first quarter. It reported decreases in operating cash flow and operating income.
These problems won’t disappear overnight. But Amazon is working on elements within its control — like productivity and use of its fulfillment network. These efforts to cut costs should help limit potential damage to earnings in the coming months.
And once the external problems ease, one particular thing can help Amazon return to growth. That’s its Prime subscription service. Prime offers members fast and free delivery as well as other benefits. Since members pay a fee, it’s in their best interest to do most of their shopping on Amazon. The company had 200 million members as of 2020, and it’s spoken in recent quarters of welcoming “millions” of new members.
The power of cloud computing
So, e-commerce presents a bit of a mixed picture for Amazon. It’s struggling now. But the future looks bright. Cloud computing, however, looks great today — and into the future. Amazon Web Services (AWS) grew net sales and operating income in the double digits in the most recent quarter. This isn’t new. AWS has been growing for years — and it’s maintained market leadership. In fact, its market share has remained between 32% and 33% in recent years, according to Synergy Research Group.
At the same time, AWS continues to expand its number of data centers and its presence across the globe. Major companies and projects have chosen AWS. For instance, Boeing is using AWS to support aerospace design, engineering, and management systems.
Here’s why AWS’ success is such a big deal. The business is a huge profit driver for Amazon. Last year, for example, AWS represented more than 70% of the company’s operating income. It looks like AWS’ momentum is set to continue over the long term. That should translate into more growth for Amazon once the general economic environment improves.
What about the share price?
Amazon’s price has fallen a lot more than its revenue has since the start of the year.
And net sales in the first quarter gained year over year — by 7% to more than $116 billion. The shares look very reasonable considering this level of revenue, and the growth potential of Amazon’s e-commerce and cloud computing businesses over time. Of course, Amazon shares may not climb overnight. Actually, I would be very surprised if they did. They could stagnate or even fall as investors wait for clues about how long higher inflation and other problems will plague Amazon.
Eventually, though, I expect Amazon’s revenue and profit to more than recover. I expect them to grow. That should lift the shares over the long term. And that means everyone may continue talking about Amazon well into the future.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.