Amazon (NASDAQ:AMZN) has agreed to buy MGM Studios, a private company, for $8.45 billion. The deal adds some serious content to Prime Video, including the James Bond films. Despite the move, AMZN stock remains in a funk that’s lasted for more than six months.
In fact, of the four trillion-dollar stocks, Amazon’s share price has delivered the lowest returns over those six months. Does that make AMZN an underdog buy?
Maybe. Maybe not.
Media Is Not a Big Driver of AMZN Stock
A longtime former Amazon executive, Jeff Blackburn, who left the company after more than 20 years in February, either was given an excellent offer by incoming CEO Andy Jassy or he really hated what he was doing at Bessemer Ventures, a San Francisco-based venture capital company.
He’s rejoining the company as Senior Vice President of Global Media & Entertainment. The Amazon division will include Prime Video, Amazon Studios (which will include MGM), Amazon Music, Wondery, its podcast business, Audible, Twitch, and video games. Amazon created the role especially for Blackburn.
Amazon reported strong first-quarter earnings at the end of April. Its free cash flow for the trailing 12 months came in at $26.4 billion, 8.6% higher than in the same period a year earlier.
The company reported that 175 million of its more than 200 million Prime members worldwide had streamed movies and TV shows over the past year.
Amazon noted in its 2020 annual report that it had spent $11 billion on Prime TV, movies, and musical content. The year before that, it had spent almost $7.8 billion on those items. However, compared to the $54 billion of revenue its AWS business generates, media is a drop in the bucket.
Four things drive Amazon’s stock price: 1) Online and in-store retail, 2) AWS, 3) Prime subscriptions, and 4) advertising. In Q1, its online and in-store retail generated $80.5 billion, or 74% of its $108.5 billion of overall sales. AWS accounted for 12%, Prime contributed 7%, and advertising added another 7%.
However, AWS continues to be the company’s largest profit center. In Q1, the segment accounted for 47% of the company’s $8.87 billion of operating income. Until one of the other three segments makes a similar contribution to the company’s bottom line, AWS, not its media assets, will get the most attention.
Amazon’s Master Plan
A little more than three years ago, I wrote an article entitled, “Amazon.com, Inc. Will Own Your Home Sooner Than You Think.” The article appeared shortly after Amazon announced it was buying Ring, the camera doorbell company, for $1 billion.
I’ll admit others made similar observations. Fellow InvestorPlace contributor Brad Moon, a techie, wrote about the possibility of an Amazon Smart Home in an earlier article about the Ring deal.
I believed at the time that Amazon’s Prime membership was becoming more like a Costco (NASDAQ:COST) membership. Brad’s observations made me ponder what Jeff Bezos and the company were up to. I argued that Prime would allow Amazon to sell consumers all the products and services it could think of.
“In Amazon’s case, it increases the number of Prime members and the amount those members spend annually by providing everything you need to run your home and life,” I wrote in the March 2, 2018 article.
“Over time, revenues will exponentially climb, and with it, the price of Amazon stock.
“Buying Ring is all about capturing additional market share of the home. Amazon is only just beginning.”
Today I think that Amazon’s AWS unit, along with its growing advertising business, suggests that not only does Amazon want to capture a big part of consumers’ home expenditures, but it also wants to grab companies’ expenditures.
The Bottom Line
In 2021, Amazon’s stock has been flat so far.
Despite the MGM deal, AMZN stock appears to be stuck in neutral. It’s going to take something far more meaningful than the purchase of a movie studio to boost its shares. In the meantime, Amazon has a free cash flow yield of just 1.6%.
At this time, any of the company’s peers is a better choice for investors than AMZN stock. Despite flatlining, Amazon stock is not an underdog buy.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.