Amazon's (AMZN -1.65%) stock split has taken effect, and it is now trading on an adjusted basis. That's creating interest among retail investors who see it as an excellent opportunity to buy the stock at a more attainable price.
But Amazon's stock split is not at all the reason you should be investing in this company. Let's take a closer look at why Amazon's more profitable segments and a relatively inexpensive valuation should be the basis for your investment decisions on this stock.
Amazon's stock split makes little difference
Amazon's 20-for-1 stock split does not change your share of the ownership pie. The move only makes it more affordable to buy whole shares. Many brokerages already offer investors the option to purchase fractional shares so a high per-share price shouldn't be an impediment.
Consider the following example. An investor owns 100 shares of a company with 1,000 shares outstanding. That company implements a 10-for-1 stock split. The investor now owns 1,000 shares of a company with 10,000 shares outstanding. In other words, ownership remains at 10% before and after the split. Instead of total shares owned, the percentage is the more critical element. That's the portion of profits you are entitled to. Since a stock split makes no difference in the percentage of profits you will get, it should not be a reason to buy or sell a stock.
That does not mean you shouldn't buy Amazon stock
Don't get me wrong; this doesn't mean you shouldn't buy Amazon stock, only that the stock split should not be the catalyst. Three valid reasons to buy Amazon's stock are that its profitable cloud segment is growing faster than the business overall, its advertising business is doing the same, and the stock is nearly as cheap as it's ever been when measured by the price-to-earnings ratio.
AMZN Revenue (Annual) data by YCharts
The Amazon Web Services (AWS) segment accelerated to 37% revenue growth year over year in its fiscal 2022 first quarter, which ended on March 31. That was an increase from the 32% rate it grew at in the same quarter the prior year. This was while Amazon saw its operating profit margin grow to 35.3%. AWS now makes up 16% of Amazon's overall sales (up from 13% in the prior year). Growing the most profitable segment of its business faster than the rest is a good cause for investors to consider Amazon.
So is the fact that Amazon is quickly taking a larger share of the $763 billion global advertising market. In Q1, Amazon's ad revenue increased by 25% to $7.9 billion. Over the previous 12 months, the figure exceeds $32 billion. Marketers are increasingly allocating their ad budgets to Amazon, which offers them access to a base of powerful buyers who have their payment method on file, have access to fast and free shipping, and are one click away from purchasing.
AMZN PE Ratio data by YCharts
Finally, Amazon's stock is trading at a price-to-earnings ratio of 56, near the lowest it has been in the last five years. The market has sold down the stock over worries about its less-profitable online sales business.
Any three or all three of the reasons above are good causes to buy Amazon stock. Investors would be prudent not to allow a stock split to change their minds about buying or selling a stock.
