On Wednesday, March 9, Amazon (AMZN) dropped a bombshell: For the first time since September 1999, the first time this century — the first time this millennium — Amazon will split its stock.
And we’re not talking a tiny 2-for-1 or 3-for-1 split, either. After watching its share price rise an astounding 4,000%-plus over the last couple decades, Amazon will need to split its $2,900 stock into much tinier pieces in order to get the per-share price down to a reasonable-seeming level. Accordingly, Amazon announced it will split its stock 20 for 1.
Amazon’s news was big enough that it’s helped add nearly eight more percentage points to the stock price since the news broke. Big as the news was, though… the stock split is not the reason Deutsche Bank just initiated coverage of the stock. No, in a note delivered on Thursday, Deutsche Bank analyst Lee Horowitz outlined several reasons to love Amazon stock, but the fact that management is chopping its stock price into lots of tiny pieces was not one of those reasons.
Instead, Horowitz said he’s recommending that investors “buy” Amazon stock because:
Firstly, investors don’t yet realize how powerful Amazon’s retail revenue growth will be “post-Covid.” (He actually believes that retail sales will grow 25% this year).
Secondly, the company’s foray into the “multi-channel grocery” business is just getting started, and Amazon has only begun to win market share here.
Thirdly, and perhaps most importantly, Amazon has $80 billion in “gross backlog additions” in its Amazon Web Services business , and “the margin implications at AWS as this backlog revenue flows through” are truly astounding — and will yield operating income improvement in excess of what even analysts are expecting.
As Horowitz observes, Wall Street analysts currently forecast only 12.5% revenue growth for Amazon’s e-commerce business in 2022 — but he thinks the company will grow retail revenues twice as fast, with help from “ongoing share gains in the massive grocery market.” Amazon, notes the analyst, is “ranked as the top grocer amongst consumers,” and even post-Covid, he expects that consumers will do 85% of their grocery shopping online going forward.
And yet, while e-commerce is certainly Amazon’s biggest business by revenue, when it comes to earning profit, Amazon’s AWS cloud computing business is far more important to the company, generating nearly 75% of operating income last year. Going forward, AWS should continue to drive profits at Amazon, with Horowitz pointing out that “digital services / commerce in 2021 was estimated at ~$4tn” globally, but AWS to date has still “only captured 4% of this opportunity.”
Going forward, Horowitz predicts AWS will grow from a $62 billion business in 2021, to $83 billion in 2022, and $107 billion in 2022 — and even after that, the company’s growth pathway should be a long one, with $3 trillion, $893 billion still remaining to be won. So long as AWS can “maintain its market leadership… as it leverages its increasingly robust up stack services while also focusing on verticalized offerings,” Horowitz believes there are plenty more gains to be made from Amazon.com stock. (See AMZN stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.