Amazon Stock Is a Long-Term Buy, But Not Because of the Split

  • Amazon's (AMZN) stock split doesn't change the fact that it is a long-term buy.
  • Share prices aren't that far above pre-pandemic levels.
  • A recovery is in the cards, so you may want to buy it at today's prices.

As you’ve likely seen in recent headlines, Amazon (NASDAQ:AMZN) has completed its long-awaited 20-for-1 stock split. Buying one or several shares of AMZN stock is much easier for individual investors than it was when each share in the e-commerce and cloud computing giant was trading at a four-figure price.

An image of an Amazon logo on a building
Source: Jonathan Weiss / Shutterstock.com

That said, for the most part, this split doesn’t change the story much.

That’s not to say that you need to take a hard pass on it if you’re looking to buy it as a long-term position.

Knocked down by the tech sell-off, uncertainties about inflation, interest rates, and a possible recession could continue to affect its near-term performance. If you have a long time horizon, though, today’s prices may be a worthwhile entry point. In time, this tech blue chip could bounce back.

The AMZN Stock Split Considered

As several of my InvestorPlace colleagues have argued, including Chris Tyler, the Amazon stock split is largely a wash. Splits make stocks more easily accessible, but they have zero impact on intrinsic value.

Yet, there’s one way the AMZN stock split could have a lasting positive effect on its performance. As Barron’s opined on June 6, splitting the stock may increase the chance this trillion-dollar company is added to the Dow Jones Industrial Average.

This would further increase buying of the stock by passive index funds and institutional investors.

Although Amazon shares spiked the day of the split, AMZN stock lost more than 12% after the pop. This FAANG component could continue to deliver middling performance.

It’s unclear whether the worst is over for the market. Only time will tell whether stocks, knocked down by inflation, interest rates, and recession fears, bottomed out in May. Or, if the true bottom hasn’t yet been reached. Still, that doesn’t mean you need to take a hard pass, if you look at this as a long-term investment rather than as a trade.

What Makes AMZN a Buy at Today’s Prices

In the near term, any positives from the AMZN stock split will likely be outweighed by negative external factors. For long-term investors, though, these unfavorable market conditions work in your favor.

Amazon’s valuation no longer has pandemic tailwinds priced in. At around $110 today, the stock (on a split-adjusted basis) doesn’t trade that far above what it traded for before the pandemic.

Admittedly, it’s still a stretch to say Amazon is a value stock. Shares continue to trade at a high multiple of estimated earnings for this year. However, today’s valuation may be a more than fair price to pay relative to its long-term prospects.

The sell-side estimates earnings will hit a split-adjusted $4.25 per share in 2024, and $6.93 per share by 2025.

In other words, the stock trades for around 17.5x earnings three years out. Once it grows into its current valuation, the stock could benefit.

Given its AWS cloud business, not its e-commerce unit, is the main source of earnings, it may be able to continue sporting a more premium tech stock valuation.

Then Bottom Line

Giving back its post-split boost, so far buying Amazon just because of this event hasn’t been profitable. The split likely will not have a lasting positive impact on its stock price.

Still, the stock, beaten down by a market that did a 180 for tech stocks, is at an appealing entry point for a long-term position. It no longer has a pandemic premium baked into its valuation. As earnings catch up in the years ahead, the opportunity for it to make a serious move higher may emerge.

This may result in solid returns for long-term-minded investors who decide to buy today. If you have the patience and are interested in adding high-quality tech names to your portfolio, AMZN stock remains one to consider.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2022/06/amzn-stock-is-a-long-term-buy-but-not-because-of-the-split/.

©2022 InvestorPlace Media, LLC