Even After Its Stock Split, Amazon Still Has Plenty of Upside

Amazon split its stock on June 6, potentially making the shares more attractive for small investors. But just because the shares are more affordable, is now a good time to buy in?

In this clip from “The Virtual Opportunities Show” on Motley Fool Live, recorded on June 7, Motley Fool contributors Jose Najarro and Travis Hoium discuss Amazon’s recent earnings results, the effect of its stock split, and what they see in Amazon’s future.

 

Jose Najarro: First, if we take a quick look at their most recent earnings, net sales grew about 7% year over year. This is a bit of a slowdown in this giant. One reason being is, hey, e-commerce plays an important role in this company’s total revenue. We can see e-commerce is pretty much 80% of the total revenue, maybe even a little bit more when we take a look at trailing 12 months. Compared to same time last year, we are seeing a little bit of a slowdown or not an accelerating growth. It’s weird to say slowdown not an accelerating growth in the e-commerce market like we saw about a year ago. But the one I’m super excited though is their AWS market. This is their cloud infrastructure. They are the No. 1 provider in the market share here with roughly 33% of the market in AWS. No. 2 is Microsoft with somewhere in the 20%. This is far ahead of the competition inform of market share. The thing that excites me the most about AWS is this is the main reason this company has some form of operating income. If we take a closer look they did take a huge net income loss this quarter. But one of the reasons being is they have to do pre-tax valuations on some of their investments and they are invested in Rivian, which ended up being a $7.6 billion loss on their net income.

Travis Hoium: Just to be clear on that they have to mark that to market. If the stock goes down, they have to put that on their income statement and that’s a change in the last I don’t know, five years or something like that. That is notable. I just wanted to clear that up if people didn’t know that.

Najarro: Yeah definitely. I think we’re seeing companies like Berkshire who own so many companies. You end up seeing that huge change in net income because of this recent change. Even they have to show us their portfolio nowadays. We’re not the only red ones. I do want to say in forms of AWS. This is the market I think is super impressive. We can see since quarter one of 2021, this has been growing quarter over quarter and year over year. If we take a closer look back at the previous year of quarter one of 2020, AWS was only about $10.2 billion business. This is a market that continues to grow around 30% every single year, which I think is great. The other one that I think is super exciting that doesn’t get too much noise is their advertisement segment.

If I go back this is their current quarter, their most recent quarter 10K. The advertisement segment now provides about $7.8 billion in revenue. Let me just say, I do believe we are seeing that bit of slowdown to some extent in the e-commerce business. If we do start to see an acceleration in e-commerce sales, I do believe the advertisement side is also going to continue to grow. What I think is fascinating about the advertisement if we go back a year ago, that advertising segment was $6.3 billion and in their actual 10K report they weren’t even listing it as advertisement. It was still bulked in into the other segments. We can see how fast this segment has grown. Amazon outside of the stock split I think there are plenty of reasons to be a little bit bullish for me. It’s definitely more of the software sides I think the less bullish Amazon for me is the e-commerce side. I’m super bullish in that subscription service on that AWS and on that advertisement platform that I was just talking about.

Kalogeropoulos: That’s cool since we’re in the weeds a little bit of the accounting stuff for Amazon. I wanted to mention this. This is from their conference call last Q4. This thing blew my mind a little bit. They said, “we’re prospectively updating the useful life of our servers and networking equipment beginning this year 2022.” They say they regularly monitor that stuff and they’re increasing the useful life of their servers from four years to five years and network equipment from five years to six years. “As a result, our first-quarter guidance includes approximately $1 billion of lower depreciation expense,” which I just thought, those are big numbers in terms of changes, and I guess they’re finding ways to more effectively use this hardware, which is a big deal for a lot of companies that we’re talking about because Meta comes to mind, too, and these companies, they’re spending tens of billions of dollars on data centers, things like that, and if that really reflects a change in terms of this hardware having longer useful life, it has a big accounting impact, but also it’s great for productivity in general.