Amazon: Evaluating The Stock Split, Growth Prospects, And Earnings

Summary

• A number of studies indicate stock splits result in market beating gains.
• Amazon stock has underperformed the market by roughly 18% over the last 12 months.
• However, AWS and advertising should provide high margin, double-digit growth for the foreseeable future.
• Looking for a helping hand in the market? Members of High Dividend Opportunities get exclusive ideas and guidance to navigate any climate. Learn More »

4kodiak/iStock Unreleased via Getty Images

Investors in Amazon (NASDAQ:AMZN) weathered three back-to-back quarters of slowing sales gains, and some expect the same in 2022. Increased capex related to the company's distribution network, cloud infrastructure spending, and macroeconomic headwinds have weighed on the stock. Factor in a pull forward of business related to pandemic restrictions. Consequently, it is reasonable to assume growth will be somewhat muted going forward.

On the other hand, AWS and advertising are growing at rapid rates, and those divisions have much higher profit margins than the ecommerce business.

With Q1 earnings scheduled for later this week, and a 20-for-1 stock split on the horizon, investors may be in for a wild ride. The question is, will the roller coaster labor up a steep slope, or careen downward?

What To Know About Amazon's Upcoming Stock Split

Amazon is set to execute a 20-to-1 share split in just over a month. There are three dates to keep in mind.

The first is the record date, May 27, 2022. To participate in the split, you must invest in AMZN on or before that day. With today's share price ($2,887.00), you will receive 20 shares of AMZN valued at $144.35 each for every share you hold. Your account will reflect the stock split by June 3, 2022, and the shares will trade on a split-adjusted basis on June 6, 2022.

There is speculation that AMZN might be added to the Dow Jones Industrials. The index requires listed stocks to have similar share prices, otherwise one name could have a disproportionate weight among the small list of stocks. The lower share price that will prevail after the split would allow AMZN to join the DOW.

If AMZN is added, this would prompt some ETFs that mimic the index to include the stock in their holdings.

Will Amazon's Stock Price Go Up After The Split?

Before I begin this exercise, it is important to note that share price action following stock splits does not exist in a vacuum. Results from the stock splits of an individual company may be influenced by a variety of factors unrelated to a share split.

With that in mind, I will review the prior splits executed by Amazon.

The firm's first stock split took place on June 2, 1998. In the six months following the split, the share price increased over 300%.

The second split occurred on January 5, 1999. Initially the stock climbed, but six months later, the share price was roughly the same as the day of the split.

The last split was executed on September 2, 1999. The price action was similar, and six months after the split, AMZN traded for about 4% higher than on the split date.

There was a degree of volatility following each of the splits that might appeal to traders. In each case, the shares traded significantly higher two and a half to four months after the split was initiated.

Aside from AMZN, there are a number of studies that indicate stock splits generally lead to share price appreciation.

In my article, regarding a potential Microsoft (MSFT) stock split, I provided data from Rice University studies that determined stock splits result in the shares of affected companies outperforming the broader markets by 12% to 16% three years after the split is initiated.

Although stock splits seem to be purely cosmetic, there is ample empirical evidence that they are associated with abnormal returns.

From a research paper by Tak Yan Leungb, Oliver Meng Ruic and Steven Shuye Wang

Amazon's Growth Prospects

It goes without saying that Amazon is the ecommerce titan. Unfortunately for investors, that aspect of the business provides low margins and requires high capex. This has been particularly true of late, as management has devoted resources to develop and expand Amazon's delivery services.

However, there is a facet of the company's retail business that promises to provide high margin, long term growth. Because of its enormous customer base, (Amazon's website attracts over two billion visitors per month) the company is able to glean a broad array of data for use in advertising.

Amazon's advertising business is growing at a robust pace. Advertising sales hit $31.2 billion in 2021. That represents a 58% increase over 2020, and a 146% increase over 2019. To put those numbers in perspective, that's 14 times larger than Walmart's advertising business, and it also exceeds YouTube's revenues ($28 billion).

Furthermore, the advertising market is growing at a robust pace, and digital advertising in particular is set to climb. According to GroupM, digital advertising comprised 64.4% of total advertising in 2021. That's an increase from 60.5% of the market in 2020 and up from a 52.1% share in 2019.

The growth rate of advertising in general, and digital specifically, is far faster than we anticipated in June.

Brian Wieser, president of business intelligence, GroupM

Zenith forecasts the global advertising market will grow 5.7% in 2023 and 7.4% in 2024; however, nearly half of that growth will come from the U.S., a market where Amazon holds distinct advantage.

eMarketer projects double-digit growth in U.S. digital ad market for at least the next two years.

Insider Intelligence

In addition to these sanguine forecasts, there is ample evidence that Amazon's advertising provides bang for the buck. Businesswire reports that 58% of brands see “great value” in Amazon Advertising, and a study by Feedvisor determined businesses report a seven times return rate when advertising on Amazon.

In addition to advertising, AWS also provides a dependable source of growth. Although Amazon's cloud service only generates a bit over 10% of the company's revenues, AWS provides over two-thirds of AMZN's profits.

Although it is true that Amazon's market share growth has stagnated while Microsoft's (MSFT) and Google's (GOOG) (GOOGL) has grown, AWS still commands about a third of that rapidly growing market.

AWS increased sales by 37% in 2019. Growth slowed a bit in 2020 due to the pandemic, increasing 30% that year, but revved back up in 2021, once again increasing by 37%. In Q4, growth for AWS increased 40%, compared to the same quarter of the prior year. Furthermore, AWS has reported four consecutive quarters of accelerating growth.

Perhaps of greater importance is that the cloud market is projected to record double digit growth for the foreseeable future. Grandview Research forecasts a CAGR of 15.7% from 2022 to 2030. This would increase the current market 272% over that time frame.

Review Of Prior Earnings And What To Watch For In Q1

Amazon shares are down nearly 18% over the last twelve months. A string of less than stellar quarterly results are a likely cause of this poor performance. In Q3, AMZN missed on the top and bottom line, and in Q2, the company missed consensus revenue estimates.

However, the EPS beat Wall Street estimates by a wide margin last quarter. Amazon's revenue increased 9% year-over- year to $137.4 billion, meeting consensus. North America sales increased 9%, AWS revenue was up 40%, and the International segment dropped by 1%.

Although net income of $14.3 billion was up 97% year over year, that was in large part due to a boost related to Amazon's investment in electric vehicle maker Rivian Automotive (RIVN).

Amazon's earnings call (Q1 2022) is scheduled for Thursday, April 28, after the market closes. Management doesn't provide guidance for earnings; however, it does forecast operating income. AMZN projects Q1 operating income to fall in a range of $3 billion to $6 billion. This would equal a 66% to 48% decline from the year-ago period.

It appears as if investors have been turned off by increased capex. For example, in Q3 of last year, management reported that for the trailing 12 months ended in the second quarter, capex and equipment finance leases increased 74% versus the trailing 12-month period. While this has weighed on profit metrics, I view it as money well spent to drive future growth.

Nonetheless, investors should watch and weigh capex, as well as supply chain and labor market issues.

Is Amazon Stock Undervalued?

AMZN currently trades for $2,806.38 per share. The average 12-month price target of the 40 analysts rating the company is $4,107.60. The Price target of the 16 analysts that rated the stock since the last quarterly report is $4315.94.

Amazon's forward P/E is 62.95x, well below the firm's 5-year average P/E of 108.56x. Its 5 year PEG is 2.15x. This compares well to Amazon's average PEG ratio over the last five years of 2.82x.

Is AMZN Stock A Buy, Sell, or Hold?

Despite the fact that Amazon is a behemoth, there are ample reasons to believe the company can sustain a high growth rate.

Amazon garnered 41% of U.S. e-commerce sales in 2021. Online retail sales are forecast to grow at an annual rate of between 14% and 15% for the next three years, according to eMarketer. While the company's investment in its logistics network over the last two years has weighed on profits, Amazon recently surpassed FedEx in terms of logistics market share in the U.S. This will serve to solidify its commanding position in ecommerce.

Unfortunately, ecommerce generates low margins: however, Amazon's scale propels it into a leading position in advertising, a rapidly growing, high margin business. Along with AWS, Amazon has two sources of robust, enduring growth.

AMZN currently trades well below its historic P/E and PEG levels. Consequently, I consider the stock to be trading at a reasonable valuation, when I weigh growth prospects. Furthermore, the advertising and cloud businesses are as sure a source of growth as one can find. I also believe it is likely the upcoming stock split will, at the very least, support the share price.

Consequently, I rate AMZN as a BUY.

Disclosure: I/we have a beneficial long position in the shares of AMZN, MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.