Amazon (AMZN -1.11%) completed a much-awaited stock split earlier this month, the first in more than 20 years. And the stock has made incredible gains over the past two decades.
Around the time of the last split, the shares traded for less than $5. They've soared more than 6,000% since then. As the shares topped $3,600 at their peak last year, investors hoped for a stock split.
The retail giant granted that wish earlier this year when it announced a 20-for-1 split. The operation doesn't change the market value of the company but lowers the price of each individual share. Investors hoped share-price gains would follow. But this time, their wish hasn't been granted. At least not yet.
Why is sentiment about Amazon negative?
First of all, with or without the split, why is sentiment about Amazon so negative these days? Amazon's revenue, profit, and its return on invested capital were on the rise over the past two years. But then things changed. All three measures have been on the decline this year.
AMZN Return on Invested Capital data by YCharts.
That's as higher inflation, supply chain challenges, and a mega-investment in its fulfillment network upset growth. Amazon is spending much more on transporting goods to their destinations. For example, the cost of shipping in international containers has doubled since pre-COVID days. Supply chain disruptions are ongoing. And Amazon expanded its fulfillment network so much that it ended up with too much capacity.
As a result, Amazon's operating cash flow and operating income both decreased in the first quarter. And its shares have lost more than 30% this year.
Let's talk about the stock split. The operation brought Amazon's shares down from more than $2,000 to about $125. That makes it much easier for investors to get in on the stock. Some investors don't have $2,000 to spend on one stock -- or don't want to. There is the option of fractional shares, but not all brokerages offer them.
All of this means, post-split, we might have seen a whole new wave of investors flocking to Amazon stock, but that didn't happen. Since the operation, the shares have lost about 9%. So the impact -- investors flocking to the shares -- didn't come right away.
But it may come later because the troubles Amazon faces today are mainly temporary and external and won't hurt Amazon forever. And they don't show a weakness in Amazon's business. Another important point is this: Amazon is working to handle the costs it can control. That's about two-thirds of incremental costs. This could make a big difference as we wait for the economic situation to improve.
Two business that will boost growth
Looking into the future, what will help Amazon thrive? There are two key elements. The first one is its e-commerce business. I'm talking about the Prime subscription service. It's added millions of members in recent quarters and renewal rates are strong. Amazon has also invested to offer members more and more benefits.
The next element is Amazon Web Services (AWS), the cloud computing business. AWS is the market leader globally. And even in this rough economic environment, the unit's sales and operating income climbed in the double digits during the first quarter. Amazon is expending AWS infrastructure worldwide. So we can expect more growth to come.
Thanks to these businesses, earnings growth should drive share-price gains, so the stock split won't be the reason behind future increases. But the stock split could help things. As mentioned above, a lower per share price makes it easier for more investors to buy the stock. And this, along with positive earnings news, could usher in a new era of share-price increases down the road.
