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Should You Sell Amazon After Splitting Its Stock?

Should You Sell Amazon After Splitting Its Stock?

Should You Sell Amazon After Splitting Its Stock?

Are investors overlooking some of the major risks?

After months of anticipation, Amazon (AMZN -1.14%) finally split its stock 20 for 1. Many investors are excited about the opportunity to buy more shares of the e-commerce giant at its new dramatically discounted price.

However, seasoned investors know that stock splits do not fundamentally change the value of a business. They simply divide the company's profits into more segments. In many ways, splitting Amazon's 20 for 1 is like replacing a $20 bill for a $1 bill. The value you keep before and after the split is the same.

Moreover, savvy investors know that Amazon faces a host of serious challenges that threaten to slow its growth and reduce its profits. So, instead of buying, should you consider selling Amazon stock?

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Online retail struggles on amazon

Amazon has long dominated the e-commerce arena. More than half of all online retail sales in the United States are done on its websites and apps. It's a similar story in many other markets around the world.

However, the growth of the global e-commerce industry is slowing down. E-commerce sales skyrocketed during the early stages of the pandemic when the closure of traditional retail stores prompted people to shop online. But people are 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. The company's online store revenue fell 3% year over year to $51 billion in the first quarter after rising 44% in the same period last year.

With e-commerce sales dropping, Amazon's costs have gone up. Rising energy prices and other shipping costs take a heavy toll. The department has also spent significant sums to double the size of the fulfillment network to meet growing consumer demand during the pandemic. But as shoppers cut back on their online purchases, Amazon is forced to clear some unused warehouse capacity to reduce expenses.

Most worrisome is Amazon's announcement on Friday that David Clarke, longtime CEO of its global 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 the popular Prime membership program. . His impending departure suggests that Amazon's e-commerce problems may persist longer than investors had hoped.

The competition is getting tougher

Amazon's cloud computing business has no shortage of challenges. Amazon Web Services (AWS) has so far maintained its place at the top of the industry it helped build. But fierce competitors, including Microsoft (MSFT 0.92%) and Alphabet (GOOG 0.55%) (GOOGL 0.60%), are doing their best to dislodge Amazon from its lofty position.

Microsoft is a particularly intimidating competitor. Its Azure cloud computing platform has grown at a much faster rate than AWS in recent quarters. Microsoft's longstanding relationships with corporate customers and popular productivity software help win contracts for its cloud services.

Google Alphabet is not to be taken lightly. The search giant is investing aggressively to gain a share in the cloud market. The Google Cloud sector is growing rapidly, especially among companies that rely on their digital marketing tools.

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So, should you sell Amazon stock?

Despite these challenges, selling now could be a mistake. Most Amazon e-commerce issues are likely temporary. Fuel prices and other shipping costs should moderate over time, particularly as Amazon shifts more of its fleet toward electric vehicles. The Company will lease or terminate leases on warehouse space that it does not currently require and grow to its remaining capacity. These and other cost-cutting measures should help Amazon achieve the "healthy level of profitability" that Amazon CEO Andy Gacy recently promised at Amazon's annual shareholder meeting.

And while investors certainly shouldn't overlook Microsoft and Google, these cloud competitors are unlikely to overtake AWS anytime soon. Google Cloud isn't profitable yet, and Microsoft hasn't disclosed Azure's profitability metrics. Meanwhile, AWS generated a whopping $6.5 billion 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 capture market share, is a testament to the value that AWS provides to its customers. It is also evidence of Amazon's strong and sustainable competitive advantages.

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