Amazon’s stock split went into effect. What now?

In March, the e-commerce giant amazon (AMZN 5.14%) announced that it would carry out a 20 for 1 stock split, and in May, shareholders voted to approve it. The split has now officially gone into effect, but what has really changed?

For every Amazon stock that previously existed, 20 took its place. In turn, the price of each Amazon share has shrunk proportionately. An Amazon share traded at $2,447 the last Friday before the split, so dividing that number by 20 means the new share price is $122.35. But Amazon’s market valuation has remained the same, at $1.2 trillion, which makes the stock split entirely cosmetic.

Companies like Amazon do this because it makes their shares more accessible to smaller investors, and the hope is that their shareholder base will expand with some of these new buyers. But fundamentally, the case for buying stock on Amazon remains exactly the same, and here’s what it is.

Image source: Getty Images.

Finding success in diverse businesses

Amazon was founded in 1994 by Jeff Bezos, who set out to leverage a concept called e-commerce to sell books online. His idea was met with much skepticism, but by 1997 the company had over 1 million customers and chose to publicly list in the tech-focused market. Nasdaq. Today it is the largest online seller in the world.

But Amazon owes its success to its aggressive expansion into new markets, which is a strategy it maintains to this day. It has driven extremely rapid growth to the point where even the world’s most famous investor, Warren Buffett, regrets not buying Amazon stock in the early days. In addition to e-commerce, the company now leads the entire cloud services industry through its Amazon Web Services (AWS) division, which has become the company’s profit engine.

It also has an advertising business that has surpassed the world’s largest video platform, AlphabetYouTube for 2021 revenue of $31 billion. The company has a huge opportunity to expand its ad segment thanks to its exciting assets such as Amazon Music and the Amazon Prime streaming platform, which now holds the exclusive rights to NFL Thursday Night Football. This is without disregarding the contribution of Amazon’s main website, which still generates more than 2 billion hits per month.

But Amazon continues to look ahead. In 2019, it bought a stake in the budding electric vehicle maker Rivian Automotive, grabbing a piece of what could be a multibillion-dollar industry for decades to come. Rivian’s investment has been a double-edged sword so far, however, bringing volatile results to Amazon’s bottom line.

a financial powerhouse

Amazon’s operational success has certainly flowed into its sales and bottom line. The company generated more than $477 billion in total revenue over the last 12 months across all of its business units and was also highly profitable in the period with $41.43 in earnings per share.

Although with the stock split now in effect, investors must divide the earnings per share number by 20 to equal $2.07, bringing it in line with the highest number of shares outstanding.

One segment, AWS, is overcoming its weight as a contributor to Amazon’s profits. The cloud platform offers its customers hundreds of online services from data storage to artificial intelligence and, despite representing just 14% of Amazon’s total revenue last year, it accounts for all of its operating income. In fact, without AWS, Amazon would have suffered an operational loss in the period.

As AWS revenue increased by 36.5% year-over-year in the recent first quarter of 2022, it is outpacing the company’s total revenue, which increased by just 7.3%. This means that AWS continues to become a bigger chunk of Amazon, indicating that the company could become more profitable overall as time goes on.

Stock split can be a positive net result

If Amazon’s reduced stock price results in a cohort of smaller investors flocking to buy the shares, it could help lift the company’s valuation. This would be especially useful in the current market environment where the Nasdaq-100 The index trades in a bear market, having dropped 25% from its all-time high.

Amazon stock is faring even worse, with a 35% loss over a similar period. Investors are currently reconsidering their growth expectations in most tech stocks because of rising interest rates and geopolitical tensions, which could hurt consumer spending.

But regardless, any effect of the stock split will be short-term in nature. Investors who enter Amazon must do so with the intention of holding for a period of five to 10 years. After all, investors who have held the shares since the company went public in 1997 have made 1,630 times their money.

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