Returns as of 03/18/2022
Returns as of 03/18/2022
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Amazon ( AMZN 2.55% ) recently announced a 20-for-1 stock split. Shareholders of record at the market close on May 27 will receive 19 additional shares for every share they own. The split will go into effect on June 6.
Unfortunately, the extra shares are not free. Shareholders get more shares, but the stock price is adjusted proportionally so that the value of the investment stays the same. Nonetheless, the lower stock price will make it easier for investors to buy a single share. If the stock split went into effect today, it means Amazon’s share price would trade for about $145. In the very near term, the lower share price could theoretically boost demand for the stock and send it a few points higher.
However, investors should bear in mind that the best reason to buy any stock is the long-term outlook for the business itself. Consider that Warren Buffett‘s Berkshire Hathaway has never split its class A shares since Buffett took over as CEO in 1965. That’s why the class A shares trade close to $500,000 per share right now, yet early Berkshire Hathaway investors have made a fortune from patiently holding their shares over decades.
Ultimately, stocks go up from a business’ ability to grow revenue and profits over a long period of time, and that’s the most important reason to consider buying Amazon regardless of the stock split.
If you had invested $1,000 in Amazon 10 years ago, the investment would be worth over $15,000 today. It’s hard to say if the next 10 years will see similar gains, but investors who hold the stock long enough can realize similar returns.
E-commerce is still an enormous opportunity for Amazon. Annual online retail sales globally are expected to exceed $7 trillion by 2025, up from about $5 trillion today. Even though Amazon reported decelerating revenue growth in 2021, that is largely due to the spike in demand during the pandemic that is causing difficult year-over-year growth comparisons. When compared to 2019 numbers, Amazon’s revenue increased at a 29% annualized rate in 2021.
During the fourth-quarter conference call with analysts, CFO Brian Olsavsky said, “We still have a very fast-growing business that’s growing globally, and we’re adding regions and capacity to handle […] usage that still exceeds revenue growth in that business.”
Image source: Getty Images.
The increase in Amazon’s capital spending is a clear indicator of more growth coming. Capital expenditures increased 52% in 2021 to $61 billion. Just under 40% of this spending is for infrastructure, such as expanding the cloud services business (Amazon Web Services). Another 30% of capital spending is for building fulfillment warehouses to process retail orders, with just under 25% allocated to building Amazon’s global transportation network.
Businesses spend more money on infrastructure when there is demand for their products and services. Amazon’s Q4 earnings report gave investors plenty of clues about the demand it is experiencing right now. The company reported that Prime members, which now exceed 200 million, are taking advantage of Prime benefits in record numbers. Last year, Amazon sent more than 6 billion deliveries to Prime members in the U.S. alone.
Amazon has built a tight-knit ecosystem of services that keep customers locked in, such as smart home devices, grocery delivery with Whole Foods, and original TV shows offered through Prime Video. It has sold more than 150 million Fire TV devices worldwide since 2014. No doubt, many customers are using their Fire TV sticks to watch Prime Video content, which is one of many perks that almost justifies a Prime subscription.
While the stock has fallen recently with the broader market, it has outperformed the Nasdaq Composite index. At the time of writing, Amazon’s stock price is down 12.5%, better than the 17.8% fall in the Nasdaq. This outperformance suggests strong underlying demand from investors, which could send Amazon’s share price off to the races when the next bull market begins.
Regardless of the near-term impact of the stock split, investors should think about holding the stock to benefit from the future growth of this dominant e-commerce business.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 03/18/2022.
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Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns as of January 1, 2021.
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