In 3 sentences:
- Amazon investors are out for a big crash and the stock will split 20-to-1 in June.
- Should investors buy the stock now or wait?
- Amazon looks expensive based on the company’s total revenue, but cheap when considered as the sum of its parts.
For investors in Amazon.com (NASDAQ: 906866) has had a tough year. The stock has fallen 35% for the year and is about 43% lower than its record highs. With rising interest rates early in the year, high-growth technology stocks sold out sharply. And the other day, the bad earnings news seemed to come from Walmart and Goal to confirm investors’ worst fears about the impact of inflation on retail sales. Since it is the two business areas that Amazon dominates, the price dropped markedly.
But with the company repurchasing shares and a share split, is now the right time to buy when others are scared?
Current detail issues
The signs of retail problems were already predicted by Amazon in its first quarter earnings report in April. Overall revenue growth fell to just 7%, down from 44% a year ago, despite accelerating cloud growth. Operating income fell to just $ 3.7 billion from $ 8.7 billion last year. Excluding Amazon Web Services’ (AWS) operating profit, Amazon’s combined North American and international retail stores had an operating loss of $ 3.8 billion. It is important to remember that this includes things like advertising and Prime subscriptions, which can have a high profit. The losses in the pure retail business are likely to be even greater.
As predicted by Walmart and Target, Amazon struggled with declining sales growth after the lockdown ended. At the same time, freight and logistics costs rose sharply due to rising fuel prices. And because Amazon had expanded its capacity so aggressively during the pandemic, the company had to settle for more capacity and staff than it needed when e-commerce revenue fell.
As if that were not bad enough, for the next quarter, management expected even slower overall growth of 3% to 7% and poorer operating income from a loss of $ 1.0 billion to a profit of $ 3.0 billion.
AWS as a bright spot
Had investors done a little more careful research, they might have been a little more enthusiastic about Amazon Web Services, the leading cloud computing platform. Organizations typically save money and gain flexibility by moving to the public cloud instead of building their own data centers, so this shift should continue through a downturn.
For the most recent quarter, AWS’s revenue increased by 37% compared to the quarter the year before (32%), while AWS’s operating income increased 53% due to higher margins. This was largely due to Amazon extending the life of its server hardware, but it was to be a permanent change.
In the last 12 months, AWS alone generated nearly $ 21 billion in operating revenue, a 43% increase. By 2022, AWS’s operating revenue could peak at $ 25 billion, which would translate into a net income of just over $ 20 billion. Amazon’s market value is currently $ 1.1 trillion, about 55 times as much.
Even if interest rates are higher today, given AWS’s leadership position and the cloud’s long-term growth prospects, it would not be an insane price to pay for AWS alone.
And recent innovations can help customers deal with inflation.
With its inventive culture, Amazon has many other projects underway in addition to its e-commerce platform and cloud computing. New initiatives like Just Walk Out technology and Project Kuiper for satellite broadband could help. Just Walk Out, which allows for free shopping, can significantly reduce costs at Amazon Freshs grocery stores and other third-party retailers using the platform.
Lower costs can allow Amazon Fresh stores and other retailers to lower prices, counteracting inflation and labor shortages for consumers. The same goes for the Kuiper project. This has the potential to bring broadband to underserved communities at a lower cost than traditional solutions.
As these projects do not yet generate significant revenue, they are largely overlooked by investors.
Historically low rating
Meanwhile, the Amazon stock is currently trading at a low valuation, at least compared to its history. This applies to both the ratio between company value and EBITDA (earnings before interest, tax, depreciation and write-downs) and the price / sales ratio. While Amazon has traded at a lower price-to-sales multiple in the last decade, that was before the company reported AWS in its 2015 financial results.
Another indication that Amazon may be undervalued is the fact that management is actually buying back shares, which the company rarely does. The last time it did so was in 2011-2012, when the share price plummeted again. This proved to be a good buying opportunity for long-term investors.
Now a sensible purchase
Amazon will complete a stock split on June 3rd. While stock splits usually result in increased interest from retail investors, this is anything but a normal time. If the U.S. economy plunges into a deep recession, it is possible that Amazon stock may fall lower.
Apart from the extreme scenario, however, there seems to be a lot of bad news priced today. Although the near future is very uncertain, the cloud business alone could be a good buy; in the meantime, I would assume that the retail business will improve – possibly already in Q3 Prime Day and the Christmas shopping season.
In addition, new innovations such as Just Walk Out and Project Kuiper offer investors new potential business areas that are not even reflected in the current price. Add stock repurchases and I suppose investors with a five- or 10-year time horizon will feel safe buying Amazon stocks at today’s prices. If you have capital and a long time horizon, do not wait for the division.
Article Amazon: buy now or wait until after the share split? first appeared on The Motley Fool Germany.
Our top stocks for 2022
There’s a company whose name gets a lot of buzz from analysts at The Motley Fool these days. It’s for us THE BEST INVESTMENT FOR 2022.
You could also benefit from it. To do this, you must first know all about this unique business. So now we have one free special report prepared, which introduces this company in detail.
Click here to download this report now for free.
Billy Duberstein owns shares in Amazon. The Motley Fool owns shares in and recommends Amazon. This article was published d 22/5/2022 at Fool.com and has been translated for our German readers.
Broget Fool Germany 2022