On June 6, e-commerce giant Amazon (AMZN -2.56%) completed its 20-for-1 stock split, which brought its stock price down to $125 per share. Now trading for $130 a pop, the stock is up 4% since the split. But while the lower price may have led to a surge in short-term interest, Amazon's solid fundamentals could power continued growth over the long term. Let's explore some reasons why.
Is Amazon stock really cheaper?
A stock split is when a company multiplies its share count to reduce its stock price without changing its market cap (the value of all shares outstanding). While this process doesn't affect valuation, it can make a stock more approachable for smaller investors. That said, Amazon's split comes at the tail end of a 23% year-to-date decline, making shares more attractive to investors shopping for a deal.
Like many Nasdaq companies, Amazon has faced downward pressure because of macroeconomic factors like inflation and rising interest rates, which tend to restrict the capital that investors have to risk in growth stocks. But the online retail giant has also faced company-specific challenges.
Amazon's second-quarter results were disappointing. While net sales increased 7% to $121.2 billion, the company's net loss spiraled to $2 billion, down from a profit of $7.8 billion in the prior-year period. The underperformance was mainly due to weakness in U.S. and international e-commerce, which faced challenges from inflation and the end of the COVID-19-related boom in 2020 and 2021.
That said, Amazon's planned expansion into new markets like Africa and Latin America (in 2023) can help reignite top-line growth while an eventual fall in the global inflation rate could relieve pressure on the company's margins.
Amazon has plenty of additional growth drivers
Arguably, the biggest reason to invest in Amazon isn't its e-commerce business. The company has a track record of successfully pivoting to new industries -- such as cloud computing -- and with its massive scale and skilled management, this trend looks likely to continue.
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In the second quarter, Amazon Web Services (AWS) saw its operating income surge 36% to $5.7 billion, helping to offset weaknesses in e-commerce. The company added new clients, including Delta Air Lines, Riot Games (a subsidiary of Tencent Holdings), and Jeffries Investment Bank. Management believes the enterprise and public sectors are at the early stages of cloud adoption as they continue to leverage AWS's strong brand and economies of scale to dominate the opportunity.
On the consumer side of things, Amazon is also making big moves in online video streaming, which is bundled with its Prime membership service. In March, the company completed the $8.5 billion acquisition of MGM Studios, a global entertainment company with over 4,000 film titles and 17,000 TV shows.
This influx of unique content (and the talent to create better original programming) could become a massive boost to the Prime Video service and possibly transform it from a loss leader for Amazon's Prime package into a viable competitor against streaming giants like Walt Disney and Netflix. Amazon Prime has over 200 million subscribers, but it is still unclear how many regularly use the video service.
Betting on a rebound
Bear markets can be difficult times to invest because many investors expect the market to continue tanking. And with the U.S. inflation rate still at an uncomfortably high 8.5% in July, investors aren't out of the woods yet.
But with the Nasdaq down 23% year to date, now is a great time to shop for deals in the market -- even if you want to wait a while before pulling the trigger. Despite near-term headwinds, Amazon looks like a long-term winner because of its relatively lower price and exciting new growth drivers.
