When an asset or index declines in value by 20% or more for a prolonged period, it's generally considered to be in bear market territory. The tech-heavy Nasdaq-100 has surpassed that mark, down 26% from its all-time high. Watching such a slide can be incredibly nerve-wracking for investors, but the broader U.S. stock market has always recovered from such events over the long term.
To address such price drops, some companies (even some of the largest in the world) have sought to create additional shareholder value during downturns through non-operating maneuvers like share buybacks and stock splits. A stock split, for example, won't improve the underlying business on its own. But some think it makes the stock more attractive to small-scale investors and boosts interest in the stock.
Amazon (AMZN -0.04%) has scheduled a 20-for-1 split to take place on June 6, and based on where it closed trading Tuesday, that would cut the share price from around $2,177 to close to $109. Conventional wisdom suggests that money will be aimed at Amazon stock from new buyers, pushing its price higher. Is this a good reason to buy Amazon stock on the dip?
Leading from e-commerce to the cloud
Investors would be better served to focus less on the stock split and more on Amazon's operational prowess. The e-commerce powerhouse leads that entire industry, but it's also a major player in technologies like cloud computing through its Amazon Web Services (AWS) business.
Using cloud services allows companies to migrate their digital operations online and also off-premises, often eliminating the need to maintain costly data centers in-house. Cloud technology has also provided collaborative tools that help teams within organizations tackle tasks together even if members are not in the same building or even the same country. And the cloud's capabilities continue to evolve, allowing customers to deploy advanced technologies like artificial intelligence to supercharge their businesses.
AWS has become the chief profit engine for Amazon, accounting for 74% of its operating income in 2021. It would have carried the company to a healthy profit in Q1 2022 as well, if not for a collapse in the stock price of Rivian Automotive (NASDAQ: RIVN), in which Amazon owns about an 18% stake.
AWS's $6.51 billion in operating income in Q1 2022 was generated from $18.4 billion in sales. The segment is on track in 2022 to exceed the $62 billion in sales it made in 2021. But that's only a small fraction of the overall cloud opportunity. By 2030, some estimates suggest the industry will be worth over $1.55 trillion annually, so AWS has plenty of room to grow.
But it gets better
Amazon continues to expand its dominance in the digital economy. In Q4 2021, it began to break out the results from its advertising business separately for the first time, revealing an operation that generated $31 billion in revenue for fiscal 2021.
The momentum carried through to the first quarter of 2022, when Amazon reaped $7.87 billion in sales from advertising -- a 23% jump from the prior-year period. Growth might be driven to new heights by properties like Amazon Music, and the broadcast rights to the NFL's Thursday Night Football, which could attract significant advertising dollars for Amazon Prime.
Based on the company's 2021 earnings per share of $64.81, Amazon trades at a trailing price-to-earnings multiple of 33. That's a slight premium to the Nasdaq-100 index, which trades at a multiple of 29, but investors would be hard-pressed to find a company that's built for the future as well as Amazon, thanks to its operational diversity. Plus, Amazon's stock price is down 42% from its peak, which presents an opportunity to pick up shares at a discount.