• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

As Amazon Preps Its Stock Split, Let's See If It's Past Its Prime

Let's take a close -- and critical -- look at the dogmatic bullishness for Amazon. I did, and here's what surprised me.
By BRAD GINESIN
Jun 01, 2022 | 12:59 PM EDT
Stocks quotes in this article: AMZN, AAPL

With just days to go before Amazon (AMZN)  splits 20 for one, it's worth putting pen to paper to understand the bull case and see if it holds up.

For those who haven't followed the news, the online retail and web services giant's shareholders recently OK'd what amounts to a stock split that will give each shareholder 19 additional shares for each Amazon one they already own -- with the price of each share worth one-twentieth of its previous value. Trading for the split-adjusted shares is slated to start June 6.

As we close in on that date, we can see a remarkable aspect of AMZN: Analysts are universally bullish and have been for years on the name. The last downgrade of Amazon shares by a major firm came in 2017 by Raymond James, which at the time broke a streak of over a year without a downgrade. With virtually every firm with a "Buy" recommendation, and significantly higher price target, why is everyone dogmatically bullish?

I understand that this is Wall Street sell-side research for a reason -- they are in the business of selling. Still, top stocks sometimes get downgraded, especially after weak earnings. Certainly, many high-profile stocks are not as universally loved. Apple (AAPL) , for instance, has far more detractors in the analyst community. Clearly, the shares of Amazon had gotten ahead of themselves during the pandemic, and last quarter's earnings were a disappointment, leading to a dramatic fall in the shares this year. Analysts still held the line. Perhaps there's an unwritten code about Amazon within the analyst community: Thou shalt not downgrade AMZN.

I generally feel a contrarian attitude when everyone is leaning on the same side of the boat, but let's put that aside and start with a clean slate. Numerous analysts have been bullish for over a decade, so knee-jerk contrarianism could be unwise. Perhaps in an unforgiving market, the shares have been overly discounted. Amazon management did emphasize that the earnings disappointment was not a demand problem.

For starters, Amazon has many moving pieces, and many analysts choose to use a sum-of-the-parts analysis to derive a price target from their five businesses -- online/physical retail, third-party seller services, Amazon Web Services, subscriptions, and advertising.

Analysts rely on an outsized valuation for AWS, 10-times to 12-times of current sales, to justify much higher price targets. At the current market valuation, the $70-plus billion business is valued far less aggressively, closer to 6-times revenue, and more in line with the re-rating of growth stocks. AWS grew revenue by 36.5% in the latest quarter to $18.4 billion. Still, concerns have emerged, including higher stock-based compensation from the competition for engineering talent and unprofitable tech companies cutting back on web services in a world leaving growth-at-any-cost behind.

Several headwinds currently prevail in their core retail business, such as the cost of diesel, higher wages, negative worker productivity from over-staffing, and under-use of the logistical footprint. Interestingly, where the stock market has been unforgiving of these challenges, analysts anticipate that continued growth will eventually turn some headwinds into a tailwind. Capital expenditures will moderate significantly and growth will resolve under-use -- helped by Prime Day in the third quarter.

Amazon is among a small cadre of companies that can consistently create multi-billion-dollar businesses. History does suggest giving Amazon the benefit of the doubt, and leads analysts to trust the company will work through issues and emerge stronger. Brian Nowak from Morgan Stanley notes that the logistics over-capacity is leading to improved delivery times and increased use of Prime, as well as helping to expand their budding third-party logistics business.

Viewing Amazon's revenues over the past three years to smooth out the pandemic surge still shows around 22% compounded annual revenue growth, which can potentially start to re-accelerate in the back half of the year. Analysts are relying on this continued growth to alleviate recent headwinds.

At current levels, analysts' bullishness for Amazon makes complete sense with a justifiable valuation. Most retail giants had a tough quarter; history suggests Amazon will make the most of the moment to gain share. The streamlining and focus on profitability by new CEO Andy Jassy is a welcome change and can turn sentiment quickly. Although a 20 for one split does not change fundamentals, we will see some benefits: AMZN will likely be added to the Dow Jones and it allows smaller investors to use a broader set of options strategies, including buy/writes. Universal bullishness is often a caution sign, but after a more than 30% pullback Amazon is on sale.

(AMZN and AAPL are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

 
 
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Ginesin was long AAPL and AMZN.

TAGS: Investing | Stocks | Food & Staples Retail | Retail | Technology

More from Stocks

How To Adjust Your Trading Style as Market Conditions Change

James "Rev Shark" DePorre
Mar 25, 2023 10:00 AM EDT

There is no single approach to the stock market that is inherently superior over the long run.

The Chasing Slows on Wall Street

James "Rev Shark" DePorre
Mar 24, 2023 4:34 PM EDT

After Deutsche Bank shakes up investors, market cools a bit, which might be a healthy development.

Stay Away From These Types of Stocks, They're Radioactive

Jim Collins
Mar 24, 2023 2:35 PM EDT

Here's what you're better off buying. I certainly have.

GE Looks Poised for a Pullback: How to Trade It Now

Bruce Kamich
Mar 24, 2023 1:45 PM EDT

The shares stopped short of my price targets.

It's Not Whether the Next Shoe Will Drop, But Where and When

Bret Jensen
Mar 24, 2023 11:30 AM EDT

A few months of anxiety likely lies ahead of us, and caution remains the watchword of the day.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • 05:00 PM EDT CHRIS VERSACE

    AAP Podcast on the Fed Decision!

    Listen here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login