3 Reasons to Buy Amazon Before Its Stock Split – The Motley Fool


Returns as of 03/16/2022
Returns as of 03/16/2022
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Amazon (NASDAQ:AMZN) recently announced that it’s planning a 20-for-1 stock split to finalize in early June. If shareholders approve the measure in May, the initiative will mark the company’s first stock split since 1999. The company has also authorized a $10 billion share repurchase program, a strong indication it believes shares are currently undervalued — and a move that will have the effect of boosting earnings per share by removing repurchased stock from the outstanding share count.
In extra excitement surrounding the stock and a split making shares more accessible for many investors, there are good reasons to buy Amazon stock before the split is carried out. Let’s take a closer look at three reasons the tech giant’s stock is worth buying right now.
Image source: Getty Images.
While Microsoft — and Alphabet, to a lesser extent — have gained ground in the cloud-infrastructure space, Amazon remains the top dog in the category and enjoys a promising growth outlook. Sales from the company’s Amazon Web Services (AWS) segment climbed approximately 37% last year to reach $62.2 billion, and segment operating income rose roughly 37% to reach $18.5 billion.
Amazon has continued to grow its cloud business at an impressive clip without giving up pricing power, and the demand outlook for its services remains quite favorable. AWS provides the backbone infrastructure for much of the modern-internet and software-applications ecosystems. Business and communications will only become increasingly reliant on digital channels, and the company is positioned to benefit from this trend.
Amazon’s leading position in cloud services makes it a top pick-and-shovel play for profiting from ongoing digital-transformation trends. The strengths of the company’s services and high switching costs for customers suggest that it will continue to enjoy a substantial moat in this essential service category.
As with its cloud-services business, Amazon’s e-commerce segment is facing some challenging growth comparisons as it laps performance elevated by pandemic-related tailwinds. The online-retail segment’s sales barely grew in the fourth quarter and ended the fiscal year with revenue up just 12% annually — its slowest expansion in decades. However, it bears repeating that this seemingly soft performance primarily stems from being compared to explosive, pandemic-driven growth in 2020.
The e-commerce market is still poised for strong expansion over the long term, and Amazon remains positioned to be one of the category’s biggest winners. While there’s room for smaller, specialized players to grow and find success, no company outside of Chinese tech giant Alibaba even comes close to matching the scope of Amazon’s scale and infrastructure advantages. Amazon has built massive resource and distribution-infrastructure advantages that will be almost impossible for competitors to supplant, and it’s in great shape to ensure it retains and expands competitive advantages over the long term.
Amazon’s dominance in the e-commerce space gives it a natural foundation for growth in the digital advertising market, and similar long-term synergies are evident in other parts of the business. Thanks to its Alexa software and corresponding Echo smart-speaker hardware, the company is already a leader in voice-based operating systems. These strong positions will present growth opportunities in their own right and supplement the strengths of other aspects of the company’s business.
Image source: Getty Images.
Amazon has emerged as an early leader in robotics and artificial intelligence, and the business will likely maintain these forefront positions and continue to advance and benefit from unfolding technology revolutions. In addition to its strong financial position, Amazon’s core e-commerce and cloud-computing services and its fast-growing digital-ads business put it in a great position to continue investing in emerging technology bets.
Perhaps no other company has a better track record of innovation over the last two decades, and Amazon has shown it’s willing to go out on a limb to come up with next-big-thing products and services capable of driving big growth. The company’s upcoming stock split could very well power another strong bullish phase for the company’s share price. However, beyond that more speculative thesis, there’s a strong fundamental bullish case for Amazon to continue being one of this century’s most influential companies and delivering market-crushing returns for shareholders.

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Stock Advisor launched in February of 2002. Returns as of 03/16/2022.
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