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AMZN Stock: Take a Small Position in Amazon Stock Now

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When Amazon.com (NASDAQ:AMZN) stock announced a 20-for-1 stock split on March 10, 2022, it may mark an ominous sell-off ahead. AMZN stock first split its shares in 1999. A year later, technology investors lost money after the infamous dot-com bubble crash in 2000.

amazon (AMZN) sign with dark background

Source: Eric Broder Van Dyke / Shutterstock.com

Ominous signs aside, Amazon.com is getting negative news coverage. Its business suspension in Russia will hurt results. Still, Amazon’s AWS cloud services are a strong growing asset that investors are overlooking.

Stock Split Lifted AMZN Stock

After falling below $2,800, Amazon shares indicated a bullish “double-bottom” support price on the chart. Buyers sent the stock to its 20-day simple moving average after the stock split announcement.

Why should the stock split matter?

With 509 million shares outstanding and a four-figure stock price, the split will increase Amazon’s affordability for retail investors. It will also raise its liquidity. The higher daily trading volume should raise the number of individual investors holding the stock. Still, just as cutting a pie in 20 pieces does not create more pie, existing shareholders do not get more of anything.

On Feb. 4, 2022, Amazon posted incredibly impressive earnings per share of $27.75. The problem with beating Wall Street’s expected $3.77 EPS is Amazon’s calculation of net income. It included a $11.3 billion pretax gain from its Rivian (NASDAQ:RIVN) holding. RIVN stock traded at over $100 at the start of 2022. After it posted weak electric vehicle deliveries and lowered its output forecast, the stock ended at around $38 last week.

Rivian Will Drag Amazon Shares Lower

Rivian, which supplies EVs for Amazon, posted revenue of only $54 million. It lost $2.43 a share in the last quarter. For 2022, it forecasts vehicle production of just 25,000. It expects an adjusted EBITDA of negative $4.75 billion. Capital expenditure will top $2.6 billion.

Markets are in no mood to buy growth companies that are losing billions of dollars annually. Rivian will soon run out of the cash it raised from its initial public offering. Within a few quarters, expect the former high-flier to sell stock. This will have a serious impact on RIVN’s stock price. Amazon holds around 160 million Rivian shares. It will need to write down at least $66 a share in the next quarter. This is based on Rivian trading at $104 at the end of 2021 and last week’s $38 share price. This is a $10.6 billion non-cash charge in the current quarter.

Shipment Suspension in Russia

In response to Russia invading Ukraine, Amazon announced on March 8, 2022, that it would take additional action in the region. It suspended the shipment of retail products to customers in both Russia and Belarus. Furthermore, it will not add new AWS customers and Amazon third-party sellers from those two countries. Customers in Russia will no longer have access to Prime Video.

Amazon may achieve little from the suspension. The ordinary Russian citizen is not directly involved with the war. They may oppose it. More importantly, Russian citizens may have no recourse in protesting the war. Still, the sons of Russian citizens are fighting the war. Sanctions imposed by American firms may encourage them to speak out against Russia’s leadership.

Investors need not worry about the lost business. Between 2014 and 2021, Amazon’s net sales grew mostly in the United States. Its sales in the United Kingdom and Germany also grew rapidly between 2019 and 2021. Those countries are among the Western nations unified in their opposition to the Russian invasion of Ukraine.

Fair Value

Investors may build a five-year discounted cash flow growth exit model to estimate Amazon’s fair value. Set a discount value of 8% in anticipation of the Federal Reserve raising rates at least five times this year.

Metrics Range Conclusion
Discount Rate 8.5% – 7.5% 8%
Perpetuity Growth Rate 1% – 2% 1.5%
Fair Value $2,835 – $3,831 $3,257

Model courtesy of finbox

In anticipating strong growth in Amazon’s AWS offsetting flat e-commerce sales, assume a perpetuity growth rate of 1.5%.

(USD in millions) Input Projections
Fiscal Years Ending 21-Dec 22-Dec 23-Dec 24-Dec 25-Dec 26-Dec
Revenue 469,822 563,786 665,268 785,016 926,319 1,065,267
% Growth 21.7% 20% 18% 18% 18% 15%
EBITDA 59,175 87,761 111,765 144,028 170,864 206,970
% of Revenue 12.6% 15.6% 16.8% 18.3% 18.4% 19.4%

Model courtesy of finbox

The above revenue targets suggest that Amazon is worth around $3,300. Amazon’s fair value will rise if the central bank does not implement an aggressive rate tightening cycle. In that scenario, consumers would have lower mortgage payments. Furthermore, the economy would continue to expand rapidly. This would increase Amazon’s e-commerce sales volumes.

The Bottom Line

Market sentiment is the primary risk on Amazon’s valuations. As a cloud-computing leader, Amazon’s forward price-to-earnings ratio at around 50 times and price-to-sales of around three times are more than reasonable. Other high-flying cloud computing stocks that lose money will keep dropping. When market optimism rebounds, AMZN stock will recover first.

Investors cannot time the market. Instead, they may control the price paid for the stock. Consider starting a small position in this tech giant for the long term.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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