Buy Amazon Stock Ahead of Planned Stock Split?

Amazon (NASDAQ:AMZN) stock has been trading much better lately, with shares up 26% from the 2022 low. Specifically, AMZN stock has been trading much better since announcing its plans for a 20-for-1 stock split. Funny how that works, huh?

I am of the opinion that Amazon should have split its stock much sooner than it did. Apple (NASDAQ:AAPL) roared to new highs on news of its stock split in 2020. Tesla (NASDAQ:TSLA) did too. Even Alphabet (NASDAQ:GOOGL, NASDAQ:GOOGannounced a stock split earlier this year ahead of Amazon.

For years, Amazon refused to split its stock and while it doesn’t change the value of its business, it’s a catalyst for the demand of its stock. At the end of the day, remember that stock prices are driven by supply and demand. The more demand, the higher the share price.

There is a time and place for stock splits. While Amazon still runs a dominate e-commerce platform and cloud-computing business, this split would have been much more timely last summer when new CEO Andy Jassy took over or again in October when Amazon reported its third-quarter numbers.

In a bear market isn’t exactly the best time, but it is what it is. From here, you don’t buy AMZN stock because of the split, although it’s a welcomed catalyst. Instead, you buy it because of its business.

Don’t Forget What Amazon Is

Bearish investors love to hate on AMZN stock and they always have. Ten years ago it was because of its valuation. Now it’s because of its lack of balance sheet strength vs. Apple and Alphabet or antitrust concerns. More recently, it’s that stock splits don’t change the fundamentals (which is true).

However, Amazon has built a can’t-live-without consumer platform. Its Amazon Prime business has an incredibly sticky moat, something that consumers don’t want to go without it. Last April, the company announced it has surpassed 200 million Prime members, no doubt fueled by the pandemic. This generates massive free cash flow, much in the way Costco’s (NASDAQ:COST) membership drives strong cash flow.

Incidentally, Amazon is now raising price of Prime from $119 a year to $139. More cash flow.

As it pertains to its balance sheet, it’s admittedly not as strong as Apple or Alphabet. However, that’s not a reason to not buy AMZN stock. Instead, I look at its growth. Analysts expect between 15% and 17.5% revenue growth in each of the next three years.

On the earnings front, analysts expect a decline in earnings this year as rising costs cut into the bottom line. In 2023 however, estimates call for ~50% growth, followed by 47% growth in 2024 and 32% growth in 2025. If that comes to fruition — and that’s a big “if” — then AMZN stock could have some serious upside.

Trading AMZN Stock

At the end of the day, how investors handle Amazon may be a little different than how they handle most other individual stocks outside of FAANG.

My advice would be: Pick a plan and stick to it. If you want to wait for the breakout in AMZN stock before getting long, then wait for the breakout and a return of momentum. Some would rather wait for a dip and/or a possible retest of the lows and that’s fine too.

Further, simply dollar-cost averaging (DCA) into Amazon is a fine and simple approach as well. When the stock eventually gets going, this stake will balloon in value.

As it pertains to the technical, notice how the stock continues to struggle with the 50-week moving average. Bulls need to see the stock reclaim this level in order for a larger rally to continue. The breakout areas to watch include $3,550 and $3,750.

On the downside, bulls need to see AMZN stock hold $3,185. Below that opens up more downside, potentially down to the $2,700 to $2,900 area.

Originally published on InvestorPlace.com

On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.