- Amazon's(AMZN) upcoming stock split does not change anything from a fundamental perspective.
- First-quarter 2022 earnings were a big disappointment and the main risks are expected to put pressure on profitability.
- The $10 billion buyback program is positive, but the stock remains too pricey.
Amazon(NASDAQ:AMZN) shares have made a nice rally of nearly 10% in the past five days, outperforming the Nasdaq, which gained nearly 2% for the same period. The news behind this rally is the upcoming 20-for-1 stock split that will alter the stock price. Investors are very excited for this.
Is this excitement justified? Is AMZN stock a buy? I argue that in both cases, the answer is a resounding no.
AMZN Stock Split Is Purely Technical
Imagine someone is giving you $2,000 in $1 bills. You exchange this amount for $100 bills and you get 20 of those bills. The total amount you have in both cases is the same. This is the same idea with the AMZN stock split. On Jun. 6, the stock will trade on a split-adjusted basis. The stock split does not change anything from a fundamental perspective.
Shares of Amazon will start trading near $121 on Jun. 6, assuming the stock price remains near the closing stock price of $2,433.68 on Jun. 1. A very important detail for investors to know is that May 27 was the crucial date on which shareholders needed to own the stock to participate in the stock split. The euphoria sent the stock higher as the stock split was approved.
Can Amazon become a member of the Dow Jones with the stock split? I don’t think it is likely, but nothing is certain. So, if the stock split does not change the real value of the company, what are other important catalysts to consider now? In one word: fundamentals.
Q1 2022: A Big Miss and a Disappointment
Amazon’s first-quarter (Q1) 2022 results were far from good. There wasa miss on earnings per share (EPS), as well as a miss on revenue.
The EPS GAAP of negative $7.56 was a miss by $15.78. Revenue of $116.44 billion was a miss by $67.09 million. It is not just the big loss reported, but the fact that “Operating income decreased to $3.7 billion in the first quarter, compared with $8.9 billion in first quarter 2021.” Additionally, “Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations decreased to an outflow of $22.3 billion for the trailing twelve months, compared with an inflow of $16.8 billion for the trailing twelve months ended March 31, 2021.”
Amazon used to generate positive free cash flow. However, in 2021, it reported a figure of negative $14.73 billion. Additionally, it has reported negative free cash flow for four of the past five consecutive quarters. In Q1 2022, free cash flow of negative $22.3 billion was the worst of the last five consecutive quarters.
The main headwinds for Amazon now appear to be high inflation, the continued uncertainty related to Russia’s invasion of Ukraine, and rising fuel prices. I expect these risks to continue for at least several months. Add in the falling Rivian(NASDAQ:RIVN) stock price and there is a mix of negative factors that weigh in now.
Is a Share Buyback Program a Solution for a Rebound?
Amazon has reported that it intends to buy back up to$10 billion worth of shares. This is a very positive development supporting the stock price. Still, shares of Amazon remain too pricey now.
Compared to the Consumer Discretionary Sector, Amazon has all its financial ratios at a very large premium. This makes AMZN stock very expensive.
In the end, ignore the stock split completely. Amazon is not cheap and the key risks will continue to harm profitability.