Forget the Stock Split – 2 Biggest Reasons to Be Excited About Amazon Stocks

Amazon ( AMZN 1.79% ) is garnering a lot of attention following the announcement of a 20-for-1 stock split on March 9. Shareholders must approve the decision in a vote on May 25 before it can go into effect.

Either way, the change will not affect shareholder ownership percentages. But there are bigger reasons to be excited about Amazon’s stock. Keep reading to find out what it is.

Image source: Getty Images.

1. Amazon web services are picking up speed

Amazon reports operating profit results for three separate segments: North America, International, and Amazon Web Services (AWS). In the fiscal year ended Dec. 31, Amazon reported operating profit of $24.9 billion. Of that total, $18.5 billion came from AWS.

Similarly, in 2020, Amazon made $22.9 billion in operating profit, and $13.5 billion came from AWS. The coronavirus pandemic has accelerated the adoption of cloud computing, and as a result, AWS is booming.

AMZN Operating Revenue Chart (TTM)

AMZN operating income (TTM) data by YCharts.

Fortunately for shareholders, the trend is unlikely to reverse because for businesses, moving to cloud computing replaces a significant upfront fixed cost with a lower recurring, usage-based cost. In its fourth quarter ended Dec. 31, AWS generated $17.8 billion in revenue. This is an increase of 40% compared to the same quarter of the previous year. Additionally, AWS has grown revenue at an accelerated rate for four consecutive quarters.

Businesses typically sign long-term contracts with Amazon for cloud services. As of December 31, 2021, the average duration of these long-term contracts was 3.8 years.

It’s not like there was a boom during the pandemic that would quickly subside afterwards. The value of these contracts also increases. As of December 31, the total value of long-term contracts for cloud services was $80 billion. This figure is up sharply from the total of $50 billion at the end of 2020.

2. Amazon becomes a dominant force in advertising

The second reason to get excited about Amazon’s stock is its growing ad revenue. In the fourth quarter, Amazon generated $9.7 billion in ad revenue. That was up 33% from the fourth quarter of 2020.

The company has over 200 million Prime members who have access to fast, free shipping on millions of items. Plus, millions more shoppers get fast, free shipping on orders over $25. Both sets of shoppers have payment information saved and are one click away from purchasing. It’s no surprise that marketers are extremely interested in catching the attention of this powerful network of buyers.

In 2021, advertisers spent $763 billion globally, which was up 22.5% from 2020. In recent years, marketers have allocated more dollars to digital channels due to the ease measurement and higher return on investment. Digital’s share of overall ad spend totaled 64.4% in 2021, up from 52.1% in 2019. According to GroupM, 85% of digital advertising outside of China will go to Facebook, Alphabetis Google and Amazon.

FB Operating Margin Chart (TTM)

FB Operating Margin Data (TTM) by YCharts.

Like cloud services, ad revenue is lucrative and generates higher profit margins than Amazon’s retail segment. If you need proof of this, consider Alphabet‘sand Meta platforms’ operating profit margins in recent years.

The proliferation of Amazon’s web services and advertising revenue — two high-margin areas — is arguably more exciting than the upcoming stock split.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Jason Norton

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