Shares rose over $100 early on March 10, despite a 1.45% overall drop in the Nasdaq. Even at that level they are down over 13% since the start of the year. The all-time high for Amazon, achieved last year, was almost $3,700.
The split doesn’t change the stock’s value. It’s psychological, making the stock seem cheaper for small investors. It’s the buyback, which will support the stock price by taking weaker hands out of it, that is the real news.
The question, however, is why Amazon did this, and why it did this now?
AMZN Stock: Jassy Under Pressure
Andrew Jassy became Amazon’s CEO last July. He’s a cautious, detail-oriented executive. Before taking over from Jeff Bezos, he ran Amazon Web Services, the company’s wildly successful cloud computing unit.
But he hasn’t done much to shake things up. He hasn’t broken the company up to dodge the antitrust police, as I suggested last June. He has been passive in the face of the stock’s fall. It’s now the fourth most valuable company, having been passed by Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
The problem is with Amazon’s store. Retailing margins are always wafer-thin. They’re supposed to generate operating cash flow, which Amazon puts into capital spending. But operating cash flow for 2021 was just 70% of 2020’s level. Fulfillment costs jumped 28% and are headed higher in the current quarter, due to the Russia-Ukraine conflict.
Amazon’s third-party sellers have created a $100 billion/year business, combining into huge operations that take the parent company on directly. Amazon’s treatment of them has been under investigation by Congress since 2019, and the House recently asked for criminal obstruction charges.
Jassy is also having big problems with physical retailing. Amazon Books, along with the 4-Star and pop-up stores, are closing. Whole Foods looks to have been a strategic error. Analysts call grocery operations “an expensive hobby” with a cloudy future. Walmart (NYSE:WMT) is crushing Amazon in this area, which is bringing it e-commerce market share.
Jassy has responded with what critics call micromanaging, using customer complaints as a lever to get answers. It’s not the “big think” analysts want to see.
This has critics wondering if the stock split isn’t just a distraction. The move comes over a month after Amazon announced 2021 earnings.
If it was a distraction, it worked. JPMorgan now calls Amazon stock a “top idea.” It sees revenue coming in at $532 billion for 2022, as it increases the cost of Amazon Prime and generates higher revenue from fulfillment services, which will be passing on those fuel cost increases.
But the key to growing profits will come from services and AWS. AWS had $18.5 billion in operating income last year, while Google Cloud lost money. AWS continues to control about one-third of the total market, with 26 data centers and 8 more on the way. AWS is also building smaller centers near the edge of its network to reduce latency. It’s the “everywhere cloud.”
Bottom Line on AMZN Stock
Investor Daniel Loeb recently said AWS is worth $1.5 trillion, more than the rest of the company combined.
Loeb agrees with me that splitting-off AWS makes sense. The store and media services would still be using AWS, only they’d be renting that capacity the way Netflix (NASDAQ:NFLX) does. Amazon Prime Video has a value approaching Netflix’ on its own, and even if the store is valued at less than its sales volume, that’s another $300 billion.
The fall of Amazon stock is putting pressure on Jassy to consider such extreme moves. The stock split won’t keep the critics at bay for long. It’s time for him to make his mark.
On the date of publication, Dana Blankenhorn held a long position in AMZN and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.