Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors get excited about stock splits. This is understandable, of course: getting more stock in your favorite company can make even the most nonchalant of us happy.
It's also true that companies announcing their intention to do a stock split usually see their stock price rise as the date of the split approaches. Even though the split doesn't change the value of the business-it just creates more slices of the same pie-many people are happy to buy more shares at lower prices.
Professional traders know this, so they also tend to buy the shares about to be split before the event itself occurs. All of these purchases can lead to higher stock prices, which attracts new impulse traders and pours oil on the fire.
But that's not what this article is about. Yes, Amazon plans to split its stock 20 to 1 this weekend. But there are many more important and interesting reasons to buy the stock today.
Here's why the cloud computing juggernaut's stock price should rise sharply.
1. AWS is a real success
When most people think of Amazon, they understandably think of its huge e-commerce business. This online retail leader holds the lion's share of many of the world's e-commerce markets. For example, about 57 percent of all online retail purchases in the U.S. are made on Amazon's platform, according to digital payments research firm PYMNTS. Thus, the company's e-commerce sites are how many people use its services every day.
However, many companies rely on Amazon for an entirely different reason. Amazon Web Services (AWS) is the dominant cloud computing platform. It is the infrastructure that millions of organizations use to run their cloud applications. AWS allows easy access to high-performance computing and storage, as well as an ever-growing array of cloud services. Advanced technologies such as machine learning and artificial intelligence are also readily available.
With lower upfront costs, using AWS for start-ups is often more cost-effective than building your data centers. AWS also gives small businesses access to many of the same tools as their larger competitors. And larger companies can use AWS to scale operations quickly while getting additional security beyond what their local networks can provide.
For these and other reasons, AWS has become a huge and fast-growing business for Amazon, as well as a critical profit driver. In the first quarter alone, segment revenue grew 37% year over year to $18.4 billion, and operating income grew an even more impressive 57% to $6.5 billion.
With the transition to the cloud still in its infancy, AWS' growth should continue to fuel Amazon's expansion for years to come.
2. Advertising Boom.
Digital advertising is another often overlooked factor in Amazon's profits. Because many consumers begin (and often end) their online shopping search on Amazon, the company's advertising platform has become an indispensable marketing tool for many third-party sellers.
Amazon offers something few other companies can offer: the ability to place ads for consumers when they are most ready to buy. People go to the platform with the explicit purpose of searching for and purchasing the products they want. Consequently, conversion rates on a company's ad network are much higher than on conventional search engines or social media sites. Merchants know this, and they are willing to pay large sums to gain access to these customers.
Amazon's advertising business, in turn, is growing rapidly. In the first quarter, advertising revenue jumped 23% to $7.9 billion. With more and more advertising spending shifting to digital channels every day, so Amazon's advertising business will only grow in the coming years.
3. Stock price is low
This year's broad market sell-off has shaken the price of even the best companies. This is true of Amazon, whose stock price has fallen by more than a quarter since the beginning of the year.
Its stock is now trading at about 20 times its projected operating cash flow of $121 per share in 2022. That's the lower end of the range in which it has been trading for the past five years.
Amazon's valuation looks even more attractive using analysts' projections for 2023. The stock is currently available for less than 14 times next year's expected operating cash flow of $176 per share.
To put it another way, Amazon stock is unlikely to trade at its current price in the coming years. It is much more likely that investors will buy the stock as AWS and advertising sales lead to a surge in the company's profits.
As long as the price is above 2325.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 2445.44
- Take Profit 1: 2625.00
- Take Profit 2: 2920.00
Alternative scenario:
If the level of 2325.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 2325.00
- Take Profit 1: 2045.00
- Take Profit 2: 1910.00
