This has been a year of star-studded stock splits. All eyes have been on the companies that have launched them -- and on their pre- and post-split performance. Stock splits on their own aren't a solid reason to buy a stock. That's because they don't change anything fundamental about a company.
But they do result in one very big positive: Splits make it easier for a broader range of investors to buy a particular stock. By issuing more shares to current holders, the price of each individual share goes down. If more and more investors jump on board and like what they see, lasting gains could follow. One of this year's biggest stock-split stars has been on the rise lately. Is it time to buy? Let's find out.
A low after the split
E-commerce giant Amazon (AMZN 1.26%) has climbed more than 20% since its June low. This low came about two weeks after its 20-for-1 stock split. Did the split cause the stock to drop? Probably not. As mentioned above, splits aren't a reason to buy a stock -- and they aren't a reason to sell a stock, either.
Amazon's weak share performance earlier this year is more of a reflection of its recent earnings reports. Like other retailers, Amazon has struggled with rising inflation and supply chain issues. Inflation hits Amazon in two ways. It lifts Amazon's costs -- such as those to transport goods, for example. And it hurts demand for its products. After all, higher inflation means consumers have less money to spend.
The troubles aren't over for Amazon. It will take some time for the company to return to profitability and free cash flow, and to see measures like return on invested capital rise.
AMZN Return on Invested Capital data by YCharts
But there's something interesting about the above chart. Of course, these measures have dropped recently. Over time, though, they've generally been on the rise. So, Amazon has a long track record of progressively gaining in these areas.
Leadership in two businesses
I'm convinced Amazon will eventually return to that positive picture. How? Through leadership in two key businesses: e-commerce and cloud computing.
Today's economic factors are hurting e-commerce. But economic downturns don't last forever. And Amazon is making efforts now to manage the current situation -- so it will come out on top once the economy improves. For example, Amazon is controlling costs and working on the efficiency of its fulfillment network.
Global retail e-commerce sales are set to grow 50% from last year to more than $7.3 trillion in 2025, according to Statista. Amazon surely will benefit.
As for cloud computing, the situation remains bright. Amazon Web Services' (AWS) sales and operating income each climbed in the double-digits in the second quarter. AWS is the global leader in this growing market, and AWS is Amazon's major profit driver. It accounted for 74% of Amazon's total operating income last year. Right now, AWS is helping Amazon through difficult times. And once these times are over, AWS truly can boost Amazon's overall revenue growth -- and help it get back to profitability.
So, is now time to buy shares of Amazon? In spite of recent gains, the stock still looks reasonably priced. It's trading at 2.7 times sales. Of course, Amazon stock probably won't take off in one straight line higher. There could be plenty of ups and downs ahead.
But following the recent stock split, Amazon could be heading into another era of gains. Not due to the split, but due to a great business that can deliver over time. And that's why now is a very good time to get in on the story.
