Tech giant Amazon (AMZN -1.11%) has generated a slew of headlines over the past few months thanks to its just-completed stock split. Although this move garnered a lot attention, stock splits do not fundamentally change the value of a company.
True, individual shares of Amazon are now more affordable, especially to those without access to trading platforms that offer fractional shares. But does the more accessible price alone make Amazon a buy? Let's take a closer look and investigate two reasons to consider the company apart from its recent stock split.
Diversified operations point to across-the-board dominance
Amazon is perhaps best known for its e-commerce business. The company's website remains one of the most visited worldwide. But Amazon's operations go far beyond e-commerce. The tech giant has a hand in many other industries. Amazon Music is a popular audio-streaming platform, and Prime Video is a big player in the video-streaming space. It also owns Whole Foods, a major grocery chain. Perhaps most notable is the company's cloud computing business, Amazon Web Services (AWS), which is booming in every sense of the word.
To be sure, having a diversified set of operations can have disadvantages. Smaller companies might suffer from spreading resources too thin, thereby affecting the quality of services. However, these disadvantages hardly apply to Amazon. The company is a leader in almost every major industry in which it competes.
For instance, at the end of last year, Prime Video was one of the largest video-streaming platforms in the U.S., second only to Netflix. Amazon Music was the third-largest music-streaming platform worldwide as of Q2 of last year. AWS is the undisputed leader in cloud computing and beats out the combined market share of its two largest competitors, Microsoft and Google, with a hefty 33% of the market. And, in e-commerce, Amazon is arguably even stronger. The company remains No. 1 in the industry, with its 41% market share dwarfing that of its closest competitor, Walmart's 6.6%.
Furthermore, the company generates plenty of cash and is in a solid financial position. Amazon ended the first quarter of this year with cash, cash equivalents, and restricted cash of $36.5 billion, although that decreased from the $42.4 billion it had as of the end of Q1 2021. Still, Amazon has the funds to continue pursuing multiple business avenues while remaining highly successful across most all of them.
Long-term potential that just keeps growing
Amazon is part of a very exclusive group of companies whose market caps exceed $1 trillion. At this levels, it may be hard to see how Amazon could still grow substantially in the coming years. But there are good reasons to believe it will. The company's most important businesses -- e-commerce and cloud computing -- are still in growth mode.
According to some estimates, the global cloud computing industry will expand at a compound annual growth rate (CAGR) of 15.7% through 2030. In the first quarter, AWS' net sales jumped by 36.6% year over year to $18.4 billion, with operating income coming in at $6.5 billion, 56.6% higher than in the year-ago period. The segment's Q1 operating margin of 35.3% was much higher than those of Amazon's North America and International segments, both of which posted negative operating margins for the same quarter.
AWS' growth runway and juicy margins will help increase the company's future sales and earnings, especially as this segment accounts for a growing percentage of the company's total income (it has been increasing its sales at a faster rate than the rest of the business). Meanwhile, e-commerce still made up just 14.3% of total retail sales in the first quarter in the U.S., and the industry is expected to record a CAGR of 14.7% through 2027. In other words: There's more good to come.
Amazon can afford to invest heavily in other businesses, such as video and music streaming. It can even do so at a loss since they make up a relatively small part of its operations. For all these reasons, it is far too premature to say that Amazon's growth days are behind it.
Facing future challenges
Amazon is facing various issues. Inflation may lead to a drop in consumer activity, which could weigh on its e-commerce segment. It's also had to deal with labor shortages and supply chain issues over the past year or so. If we are heading toward a recession, as some analysts have predicted, things could get worse for Amazon before they get better.
But even in this environment, investors should stick with the tech giant. The company's diversified operations -- including several businesses in which it is a leader -- will help it reverse course once these economic troubles are in the rearview mirror. For patient investors, Amazon can still deliver market-beating returns in the next decade.
