Down 29% year to date, the Nasdaq Composite index is in a bear market, making now a potentially good time to bet on quality companies trading for cheap. Fresh off its much-anticipated 20-for-1 stock split, Amazon (AMZN 3.55%) might fit the bill. Here are three reasons the e-commerce giant looks poised for long-term success.
1. The shares are relatively cheap
A stock split is when a company divides its share count by a predetermined amount without changing its market cap (the value of all the shares outstanding). Although stock splits don't impact fundamentals, they make shares cheaper and more psychologically appealing for smaller investors. That said, Amazon's June 6 stock split comes at the tail end of a massive 35% year-to-date decline. So (in this case, at least), the stock is now relatively cheaper in both price and valuation.
With a market cap of $1.2 trillion, Amazon trades for just 2.4 times trailing 12-month revenue. And while this number is in line with the S&P 500's average of 2.4, it is dramatically lower than its Nasdaq peers, which boast an average price-to-sales multiple of 4.5. Amazon's trailing price-to-earnings multiple of 55 also looks reasonable considering its potential for significant bottom-line expansion over the long term.
2. Cloud computing is firing on all cylinders
So why does Amazon deserve a healthy bottom-line valuation? Hint: it's not its core e-commerce business. While the company's third-party online marketplace and related services (such as Prime subscriptions) currently form the backbone of Amazon's revenue, its cloud computing business -- Amazon Web Services (AWS) -- looks set to power its profit growth for decades to come.
In the first quarter, Amazon's net sales only increased by 7% year over year to $116.4 billion because of softness in its North American and international e-commerce segments. Both geographies may have over-expanded during the pandemic boom and now face overstaffing and excess capacity according to management. But Amazon's cloud computing segment is bucking the trend.
AWS revenue jumped 37% to $18.4 billion, with operating profit up by a massive 57% to $6.5 billion compared to a $2.8 billion loss in the company's e-commerce operations. While it is unclear if Amazon's cloud business will maintain its trajectory, analysts at research firm Redburn are extremely optimistic, projecting AWS to eventually be worth $3 trillion alone because of its advantages in scale, cost and technology compared to rivals.
3. Other businesses could help power growth
Amazon's success has relied on its ability to pivot to synergistic industries to drive growth. First, it was an online bookstore, then a generalized e-commerce marketplace, and finally, a diversified tech platform that earns most of its profit from cloud computing. More businesses could be next.
According to Business Insider, Amazon has become the third-biggest digital advertising company (behind Alphabet's Google and Meta Platforms' Facebook), with $31 billion in 2021 ad revenue. Amazon is also pushing deeper into direct-to-customer streaming through its $8.5 billion acquisition of MGM Studios. This deal could add thousands of film titles and TV episodes to its Prime Video content portfolio -- positioning it to compete with streaming rivals in unique and original content offerings.
Amazon's massive scale allows it to unlock value in industries adjacent to its core business, helping lay the foundation for continued expansion. Will the company become the next Netflix or Google? Who knows. But given its track record of success in different industries, I wouldn't bet against it.