- Investors they get excited about stock splits. It's certainly understandable: getting more shares in your favorite company can make even the most stoic smile.
It is also true that companies that announce their intention to split their shares tend to see their share price rise as the split date approaches. While splits don't substantially alter a company's value - they simply create more slices of the same pie - many people are happy to buy more shares at lower prices.
Professional traders know this and therefore tend to buy stocks that are about to be split before their split date. All of these purchases can drive up stock prices, attracting other momentum traders and adding fuel to the fire.
But that is not the subject of this article. Yes, Amazon (Amazon shares - ticker AMZN) is planning to split its stock 20 to 1 this weekend. But there are far more important and exciting reasons to buy the stock today.
That's why the cloud computing giant's share price is set to rise.
1. AWS is a beast
When you think of Amazon, you understandably think of its huge e-commerce business. The leader in online retail takes the lion's share of many global e-commerce markets. For example, approximately 57% of all online retail purchases in the United States are made on Amazon's platform, according to digital payments research firm PYMNTS. Therefore, the company's e-commerce sites are how many people use its services every day.
However, many businesses rely on Amazon for a completely different reason. Amazon Web Services (AWS) is the dominant cloud computing platform. It is the infrastructure that millions of organizations use to power their cloud-based applications. AWS makes it easy to access high-performance computing and storage, as well as an ever-growing range of cloud services. Also available are cutting-edge technologies, such as machine learning and artificial intelligence.
With lower upfront costs, it is often cheaper for startups to use AWS than to build their own data centers. Additionally, AWS allows small businesses to access many of the same tools as their larger rivals. Large enterprises can use AWS to quickly scale operations while gaining additional security over what their internal networks might offer.
For these and other reasons, AWS has become a huge and fast-growing business for Amazon, and its most important profit engine. Segment revenue increased 37% from the previous year, reaching $ 18,4 billion in the first quarter alone, while operating profit surged even more impressive 57% to 6,5. billions of dollars.
With the move to the cloud still in its infancy, AWS growth should continue to fuel Amazon's expansion for many years to come.
2. Advertising is booming
Digital advertising is another often overlooked profit factor for Amazon. As many consumers start (and often finish) their online shopping searches on Amazon, the company's advertising platform has become an indispensable marketing tool for countless third-party merchants.
Amazon offers what few other companies can offer: the ability to advertise to consumers when they are most ready to buy. People turn to the platform with the express purpose of looking for and buying the items they need and want. Conversion rates on its advertising network therefore tend to be much higher than on search engines or social media sites. Merchants know this and are willing to pay large sums to gain access to these customers.
Amazon's advertising business, in turn, is growing rapidly. Ad revenue increased 23% to a whopping $ 7,9 billion in the first quarter. With an increase in ad spend shifting to digital channels every day, Amazon's burgeoning advertising business is set to grow significantly in the coming years.
3. The title is cheap
The large sell-off in the market hit the prices of even the best companies this year. Among these is Amazon, which has seen its stock lose more than a quarter of its value since the beginning of the year.
The stock is now trading at around 20 times its projected operating cash flow of $ 121 per share in 2022. This is the lower end of the range it has been trading in over the past five years.
Amazon's valuation looks even more attractive if analysts' estimates for 2023 are used. Currently, its shares can be purchased for less than 14 times the expected operating cash flow for next year of $ 176 per share.
In other words, Amazon stock is unlikely to trade at its current price in the next few years. Investors are much more likely to bid up on the stock when AWS and advertising sales drive up profits.