Spurred on by a 26% drop in the stock’s market value since the all-time high of July 2021, Amazon’s management is looking to instil fresh confidence with a 20-for-1 stock split and a $10 billion share buyback – the first direct distributions of cash back to the company’s shareholders since its 1997 stock market listing,
A 2.4% gain in the share price suggests that some investors may be buying into the show of confidence, but the company may need to do more than start managing its share price as intently as it manages its customer services if the shares are to roar higher again, especially as the fourth-quarter numbers raised as many questions as they did answers.
AJ Bell Investment Director Russ Mould said: “Even allowing for those spotty year-end numbers, investors should consider the following questions before they decide that the Amazon buyback is the sort of signal that they should be following:
- To what degree is this financial engineering rather than investment in the service proposition and competitive position of the company? The bull case for Amazon has long been that it will win customers and take share, demolish the opposition and then jack up prices when it has a dominant market position, turning itself into a wildly profitable cash machine. It is the service offering that has made Amazon such a compelling long-term investment thus far, so would the money not be better spent there?
- Are Amazon executives buying stock with their own cash rather just the company’s funds? Surely that would be a much more powerful signal still that they feel real value is there to be had?
“In addition, investors might like to apply the two tests laid down by Warren Buffett in his 2012 letter to shareholders in his Berkshire Hathaway investment vehicle.
“At first glance Amazon passes the first of Buffett’s tests easily, because at the end of 2021 it had $42 billion in cash on its balance sheet, with another $42 billion in liquid securities on top of that trove.
“However, cash flow has been negative five times in six quarters as margins have come under pressure and Amazon has taken on extra liabilities, too, in the form of cheap debt and leased assets.
“Borrowings have risen to $48.7 billion from $23.5 billion since the end of 2018 and lease liabilities have surged to $67.7 billion from $9.7 billion over the same period.
“Once those lease liabilities are included, Amazon has gone from a net cash position of $8.1 billion to a net debt of $32 billion.”