AMZN with Nobias Technology: Case study of Amazon after stock split and buyback announcement
Amazon shares have outperformed the major averages by a wide margin over the long-term.
However, during the trailing 12 months, AMZN shares have underperformed.
Analysts believe that the recent stock split and buyback announcement has the potential to change this bearish momentum.
After a decade of massive outperformance, Amazon (AMZN) shares have seen stagnating share price appreciation in recent years. During the trailing 10-year period, AMZN shares have generated total returns of 1,566.68%, beating the S&P 500’s 225.95 10-year performance by a wide margin. However, during the trailing 12 months, AMZN has underperformed, posting 8.02% gains as opposed to the S&P 500’s 15.98% growth. Amazon posted tremendous fundamental growth during the COVID-19 period, with its earnings-per-share rising by 82% in 2020 and another 55% on top of that in 2021. However, this bottom-line growth hasn’t been enough to push its share price higher.
And yet, even with recent underperformance in mind, the credible authors and analysts that we track with the Nobias algorithm continue to express very positive sentiment when it comes to Amazon stock. 82% of recent articles published by credible authors (those with 4 and 5-star Nobias ratings) have included a “Bullish” rating. And, the average price targeting being applied to Amazon shares by credible analysts that the Nobias algorithm tracks is currently $4,163.93. When compared to Amazon’s current share price of $3,295.87, this represents upside potential of approximately 26.3%.
Looking at recent reports published on the stock, it’s clear that a couple of recent announcements made by Amazon’s management team are fueling this bullish sentiment. One such catalyst is Amazon’s recently announced stock split. On 3/9/2022, Amazon announced that its board of directors approved a 20-for-1 stock split.
AMZN March 2022
The 8-K Form filed with the SEC said: “On March 9, 2022, the Board of Directors of Amazon.com, Inc. (the “Company”) approved a 20-for-1 split of the Company’s common stock to be effected through an amendment to the Company’s Restated Certificate of Incorporation (the “Amendment”). The Amendment will also effect a proportionate increase in the number of shares of authorized common stock. The stock split and the proportionate authorized share increase are subject to shareholder approval of the Amendment at the 2022 Annual Meeting of Shareholders (the “Annual Meeting”), which is currently scheduled to take place on May 25, 2022. The Company’s definitive proxy statement relating to the Annual Meeting will include additional details regarding the Amendment.
Subject to shareholder approval of the Amendment, each Company shareholder of record at the close of business on May 27, 2022 will have 19 additional shares for every one share held as of such date reflected in their accounts on or about June 3, 2022. Trading is expected to begin on a split-adjusted basis on June 6, 2022.”
Technically, this stock split hasn’t been officially approved by shareholders yet, but due to recent bullish activity surrounding other tech stocks that have split their shares recently (such as Apple (AAPL), Tesla (TSLA), and Nvidia (NVDA)) it’s widely expected that this measure will receive strong shareholder approval.
Adria Cimino, a Nobias 5-star rated author, recently published an article at The Motley Fool titled, “3 Unstoppable Stock Split Stocks to Buy Right Now” highlighting the potential benefits of this move. Cimino described what a stock split is, and why companies do them, saying, “The company lowers the price of each individual share -- but offers current investors more shares. The company's market value and the total value of each investor's holding remains exactly the same. And the movement opens up the investment door to a broader range of individuals. It's a win-win situation. Why buy companies that have done or plan a stock split? Because the need for a split usually means business has been booming.”
Amazon’s high share price has been a limiting factor for certain investors for years. This 20-for-1 split should address this. Cimino said, “Investors have been dreaming about an Amazon stock split for quite some time. The shares have soared 5,700% since their last such operation back in 1999. And last year, they reached a record high of more than $3,600.” But, Cimino isn’t just bullish on AMZN shares because of the split alone.
Regarding Amazon’s operations, she wrote: “The online retail business and cloud computing unit Amazon Web Services (AWS) have driven gains. But these businesses' growth is far from over. For retail, Amazon's Prime subscription service keeps customers coming back with free shipping and many other benefits. The company grew members to more than 200 million worldwide in 2020. And in the most recent quarter, Amazon added "millions" more. AWS is the leading player in the cloud computing market -- and represents more than 70% of Amazon's operating income. All of this indicates there's a lot more to come for Amazon.”
Dan Burrows, a Nobias 5-star rated author, also put a spotlight the bullish nature of Amazon’s split announcement in a recent article. In Burrow’s piece at Kiplinger, Burrow notes that the move “Puts It in Play to Join the Dow”. In his article, Burrow quoted an Amazon spokesperson who said, “"This split would give our employees more flexibility in how they manage their equity in Amazon and make the share price more accessible for people looking to invest in the company.”
Burrow makes the same point Cimino did, with regard to a lower share price driving more demand for shares, especially from retail investors. However, Burrow goes a step further, highlighting the potential for inclusion into the Dow Jones Industrial average, which would drive incrementally higher. He explains, “The S&P 500 and Nasdaq Composite determine their weights by market capitalization (stock price multiplied by number of shares outstanding.) But the Dow – created way back in 1896 – is weighted by the company’s stock price.”
Right now, Burrow notes that the highest priced stock in the DOW is United Healthcare, which trades for $519.22/share. He said that Amazon couldn’t be rationally considered for DOW inclusion with it’s current $3,200 share price because of the stock-price-weighted nature of the DOW. Simply put, Burrow says that adding Amazon to the index at its current price would turn the DOW into the “Amazon & Friends Average.” But, a split changes that. And, Burrow says, since the DOW is meant to “reflect the broader economy” it might make sense for the largest domestic e-Commerce retailer and cloud play to be included. He wrote, “True, the blue-chip barometer can't be beat for brand familiarity. It might be fitting if Amazon joined the Dow.”
With regard to the incremental demand that such a maneuver would create, Burrow said: “All that said, investors should also know that being tapped for Dow inclusion is largely symbolic. Some $13.5 trillion is indexed or benchmarked to the widely used S&P 500. That means passive funds tracking the S&P 500 must own all of its components, weighted by market value. Period. Many other sector and “smart beta” funds that track all or part of the index in some way also are forced to own some or all of the S&P 500’s components.” However, he goes on to point out the relatively small size of DOW benchmarked funds relative to Amazon’s current market cap, saying, “However, only $36.6 billion is indexed or benchmarked to the Dow. Mega-cap stock AMZN, by itself, is worth roughly 40 times all the money tracking and chasing the industrial average.”
Burrow concluded his piece saying, “What we do know about the Amazon stock split is that it should bring in loads of retail investors. That, in turn, could light a small fire under shares, at least for a while. Just be aware that volume in Amazon stock would likely also increase – and so volatility very much could too.”
Another potential catalyst for an Amazon rally is the $10 billion buyback that the company recently announced. In the March 9th SEC filing, Amazon said: “On March 9, 2022, the Board of Directors also authorized the Company to repurchase up to $10 billion of the Company’s common stock. The program allows the Company to repurchase its shares opportunistically from time to time when it believes that doing so would enhance long-term shareholder value. The repurchase authorization does not have a fixed expiration. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing. This stock repurchase authorization replaces the previous $5 billion stock repurchase authorization, approved by the Board of Directors in 2016, under which the Company had repurchased $2.12 billion of its shares.”
While a stock split doesn’t do anything to change Amazon’s fundamentals on a per-share basis, a stock repurchase program which reduces the company’s outstanding share count will bolster bottom-line results.
Julian Lin, a Nobias 4-star rated author, recently published an article at Seeking Alpha titled, “Amazon Stock Forecast: How Will The $10 Billion Buyback Impact Investors?”
In this report, Lin said, “AMZN has $96 billion of cash & equivalents on its balance sheet versus $48.7 billion of long term debt. It can easily afford to pay for the share repurchase program using cash on hand. In general there is only one reason why companies choose to buy back their stock and that is because they feel the stock is undervalued.”
With regard to the near-term impact on fundamentals, Lin notes that the recently announced buyback is likely to represent a minimal bullish tailwind. He said, “AMZN has a market cap of $1.6 trillion, meaning that the $10 billion program, if executed in full, represents less than 1% of shares outstanding.” However, Lin continues, “That said, this buyback potentially is very meaningful over the long term if it reflects a shift in AMZN’s capital allocation policies.”
Billy Duberstein, a Nobias 4-star rated author, also recently published an article noting the bullish prospects associated with Amazon’s buyback. In his article, titled, “Why Now May Be the Perfect Time to Buy Amazon” Duberstein highlighted why a company like Amazon might consider repurchasing shares. He wrote, “one, that management believes shares are undervalued, and two, that the company may be in for a cash windfall this year.” He continued, “Why might Amazon be in for a cash windfall? Because it's coming off of an absolutely massive investment cycle necessitated by the pandemic. After spending $16.8 billion in capital expenditures in 2019, Amazon invested $40.1 billion in capital expenditures in 2020 and a whopping $61 billion in capex in 2021.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
With regard to capex, Duberstein said, “The company has also been buying more planes to fulfill demand without having to depend on third parties for shipping. Amazon has also more than doubled its workforce since the beginning of 2020, from 800,000 to over 1.6 million employees by the end of 2021.” Duberstein notes that these investments have come at a “huge cost” to the company and the damage that they’ve done to the company’s cash flows have likely factored into the stock’s recent underperformance. He said, “Though revenue rose 21.7% in 2021, operating income only rose 8.6%, and free cash flow went into the red, with a $15 billion cash burn last year, compared with $26 billion in free cash flow in 2020.”
But, Duberstein believes that Amazon’s record high capex is coming to an end. He said, “With the capital-intensive e-commerce business coming off a massive investment cycle, and high-margin AWS and ad revenues making up more and more of the business, Amazon's cash flow stands to inflect higher this year. That could lead investors to warm to the stock again.”
Duberstein concluded his piece saying, “Based on history, it's generally been good policy to follow management's lead; shares are up over 1,400% since the last stock repurchase, even after the recent sell-off.“
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long AMZN, AAPL, and NVDA. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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