After months of anticipation, Amazon (AMZN -2.22%) has finally split its stock 20 for 1. Many investors are excited about the opportunity to buy more of the e-commerce giant’s shares at its new, significantly reduced price.
Yet experienced investors know that stock splits do not fundamentally alter the value of a business. They simply carve a company’s profits into more slices. In many ways, Amazon’s 20-for-1 split is like exchanging a $ 20 bill for $ 20 1 bills. The value you hold before and after the split is the same.
Moreover, astute investors know that Amazon is facing a host of serious challenges that threaten to slow its growth and dent its profits. So, rather than buy, should you be thinking about selling Amazon’s stock?
Amazon’s online retail business is struggling
The e-commerce arena has long been dominated by Amazon. More than half of all online retail sales in the US take place on its websites and apps. It’s a similar story in many other markets across the world.
Yet the growth of the global e-commerce industry is slowing. E-commerce sales skyrocketed during the early stages of the pandemic when traditional retail store closures drove people to shop online. But people are once again returning to their favorite stores now that many COVID-19-related safety measures have been lifted.
These trends can be clearly seen in Amazon’s sales metrics. Revenue for the company’s online stores fell 3% year over year to $ 51 billion in the first quarter after soaring 44% in the prior-year period.
While its e-commerce sales are falling, Amazon’s costs are rising. Higher energy prices and other shipping costs are taking a toll. Management also spent heavily to double the size of its fulfillment network to meet booming consumer demand during the pandemic. But as shoppers steam back their online purchases, Amazon is being forced to vacate some of its unused warehouse capacity to reduce expenses.
More worrisome is Amazon announced on Friday that David Clark, the longtime CEO of its Worldwide Consumer division, plans to resign on July 1. Clark is responsible for the company’s e-commerce marketplaces and physical retail stores, as well as its popular Prime membership program . His imminent departure suggests that Amazon’s e-commerce troubles could persist for longer than investors had hoped.
Competition is intensifying
Amazon’s cloud computing business also faces no shortage of challenges. Amazon Web Services (AWS) has so far maintained its place atop the industry it helped build. But fierce competitors, including Microsoft (MSFT -0.39%) and Alphabet (GOOG -0.99%) (GOOGL -0.91%)are doing everything they can to dislodge Amazon from its lofty position.
Microsoft is a particularly fearsome rival. Its Azure cloud computing platform has grown at a significantly faster clip than AWS in recent quarters. Microsoft’s longtime relationships with its corporate customers and popular productivity software are helping it win contracts for its cloud services.
Alphabet’s Google should also not be taken lightly. The search giant is investing aggressively to gain cloud market share. Its Google Cloud division is growing rapidly, particularly among companies that rely on its digital marketing tools.
So, should you sell Amazon stock?
Despite these challenges, selling now could be a mistake. Most of Amazon’s e-commerce troubles are likely to be transitory. Fuel prices and other shipping costs should moderate over time, particularly as Amazon shifts more of its fleet toward electric vehicles. The company will sublet or end leases on the warehouse space it does not currently require and grow into its remaining capacity. These and other expense-reduction measures should help Amazon achieve the “healthy level of profitability” CEO Andy Jassy promised recently during Amazon’s annual shareholder meeting.
And although investors should certainly not overlook Microsoft and Google, these cloud rivals are unlikely to dislodge AWS from its throne any time soon. Google Cloud is not yet profitable, and Microsoft has not disclosed Azure’s profitability metrics. AWS, meanwhile, produced a whopping $ 6.5 billion in operating income in the first quarter alone. Amazon’s ability to generate profits of this magnitude, despite Microsoft’s and Google’s best attempts to wrestle away market share, is a testament to the value AWS is providing to its customers. It’s also evidence of Amazon’s powerful and sustainable competitive advantages.
So, if you own Amazon stock, hang onto your shares for the long run.