Stock Analysis & Ideas

Amazon’s Stock Split Only Adds to Its Bull Case

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Amazon split its stock, attracting a mixed opinion from the stock market. Moreover, it’s struggling from a financial perspective of late, but its long-term case powered by its cloud-computing behemoth AWS makes it worth considering.

E-commerce giant Amazon (AMZN) is a household name for many. People turn to the company for everyday groceries, merchandise, and whatnot. However, it’s in the news these days for its 20-for-1 stock split.

The stock split has generated interest among retail investors, allowing them to pick up the stock at a reasonable price. However, the stock split does little to Amazon’s rock-solid fundamentals.

Many long-term investors, though, are laser-focused on a company’s fundamental strength, and that too has made them apprehensive of late. Tough comps in the post-pandemic world have had a lot to with it, including the tough macro-economic conditions at this time. Nevertheless, we are bullish on AMZN stock.

Distress Surrounding Amazon

Amazon stock plunged soon after the company’s first-quarter reports declared a sharp loss on April 29. AMZN blamed high inflation, the pandemic, and the Russian invasion for its frail performance, but is it just the external factors creating hindrances for the company?

Amazon, the e-commerce beast, appeared unbeatable for a long time. The company gave shivers to its competitors as its stock ascended to the four-digit territory. However, recently Amazon has had a rough outing in the stock market, shedding around 14% in late April, the most significant single-day drop since 2006. The drop wasn’t a one-time misfortune because the company’s stock continued to fall once the quarterly reports were uploaded.

Unfortunately, the company announced the slowest quarterly growth rate since 2001. Amazon’s revenue increased 7%, amounting to around $116 billion compared to the 44% growth experienced in the previous year.

The company’s growth could be hampered further because it is struggling due to inflation and supply-chain problems, but here’s good news – these external issues are transitory. Amazon is constantly working to meet capacity requirements and enhance productivity. This could entail that the stock’s future is bright.

Talk of the Town – AMZN Stock Split

Based on history, stock splits have resulted in the outperformance of shares. According to Bank of America (BAC), stock splits have led to 25% increases in share prices, on average, one year following a split. This is mainly because investors perceive the split as a sign of confidence from the management’s side.

Surprisingly, this isn’t the case with AMZN. The company’s shares didn’t perform satisfactorily post-split, but you shouldn’t only look at shares when thinking about investing in Amazon. The company is a gripping case considering its massive 22% and 57% revenue and net earnings growth (respectively) in 2021.

The stock split might attract investors to the stock, but it will take some time before it gains. After the 1999 stock split, the stock experienced a sustained dip. 

Amazon’s cloud computing business, though, seems as compelling as ever. Amazon Web Services (AWS) experienced a 32% increase in sales in the first quarter of 2022, maintaining leadership in the market. Moreover, its ad revenue in the first quarter came in at a whopping $7.9 billion. Many blue-chip companies are allocating hefty advertising budgets to Amazon’s advertising channels, resulting in a massive growth runway over the long run.

Wall Street’s Take

Turning to Wall Street, AMZN stock maintains a Strong Buy consensus rating. Out of 38 total analyst ratings, there are 36 Buys, one Hold, and one Sell rating.

The average Amazon stock price target is $178.66, implying 66.1% upside potential. Analyst price targets range from a low of $107 per share to a high of $212.50 per share.

The Bottom Line on AMZN Stock

Amazon’s stock is currently trading at a price-earnings ratio of around 52. This is the lowest the company has experienced in the last five years because investors have rotated out of growth stocks recently. This could be the reason holding back AMZN at this time, but it has nothing on its long-term bull case.

The company’s shares seem attractive based on its revenue, and the cloud computing business will contribute immensely to the value of its shares. Of course, AMZN will not soar overnight, but it might grow in the future.

Experts believe the company’s growth will climb, which should also lift the shares. So, AMZN might not be on your radar today, but it could be a steal when looking back years from now.

Disclosure

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