Amazon | Fundamental Analysis | LONG Down 29% over the year, the Nasdaq Composite Index is in a bear market, so now is potentially a good time to bet on quality companies trading at a low price. Amazon, which just completed its long-awaited stock split, could be a good fit. Here are a few reasons why the e-commerce giant can expect long-term success.
The stock is relatively cheap
A stock split is when a company divides the number of its shares by a predetermined number without changing the market value (the value of all shares outstanding). Although a stock split does not affect fundamentals, it makes the stock cheaper and psychologically more attractive to small investors. Nevertheless, Amazon's June 6 split came at the end of a massive 35% year-over-year decline. So (at least in this case) the stock is now relatively cheaper in both price and valuation.
With a market value of $1.2 trillion, Amazon is trading at just 2.4 times its 12-month earnings. And while that figure is in line with the S&P 500 average of 2.4, it is significantly lower than that of similar Nasdaq companies, which have an average price-to-earnings ratio of 4.5. Amazon's projected price-to-earnings ratio of 55 also looks reasonable, given the potential for significant earnings growth over the long term.
Cloud computing is running at full throttle
So why does Amazon deserve a healthy bottom line? Hint: It's not about its core e-commerce business. While third-party online marketplaces and related services (such as Prime subscriptions) currently form the backbone of Amazon's revenue, its cloud computing business, Amazon Web Services (AWS), looks set to deliver revenue growth for decades to come.
Amazon's first-quarter net sales rose only 7% year over year to $116.4 billion because of weakness in its North American and international e-commerce segments. According to company executives, both geographic segments may have expanded too much during the pandemic boom and now face overstaffing and overcapacity. Amazon's cloud segment, however, is bucking that trend.
AWS revenue jumped 37% to $18.4 billion and operating income rose 57% to $6.5 billion, compared with a loss of $2.8 billion on the company's e-commerce operations. While it's unclear whether Amazon's cloud business will maintain its trajectory, analysts at research firm Redburn are extremely optimistic, predicting that AWS will eventually be worth $3 trillion just because of its advantages in scale, cost, and technology over its competitors.
Other divisions could contribute to the growth
Amazon's success has been based on its ability to move into synergistic industries to drive growth. First, it was an online bookstore, then a one-stop e-commerce marketplace, and finally a diversified technology platform that gets most of its profits from cloud computing. Other types of businesses may be on the line.
According to Business Insider, Amazon has become the third-largest digital advertising company (behind Alphabet's Google and Meta Platforms' Facebook), with $31 billion in ad revenue in 2021. Amazon is also going deeper into streaming directly to the consumer through its $8.5 billion acquisition of MGM Studios. This deal could add thousands of movie and TV series titles to Prime Video's content portfolio, allowing the company to compete with streaming competitors for unique and original content offerings.
Amazon's scale allows it to discover value in industries related to its core business, laying the groundwork for further expansion. Will the company become the next Netflix or Google? Who knows. But given its track record of success in various industries, don't bet against it.
