Following regulatory approval, Amazon has acquired MGM studios in a deal worth $8.5bn. MGM comes with over 4,000 film titles and 17,000 TV episodes and is expected to sit within Prime Video.
The deal was first announced in 2021, but was dependent on anti-competition approval in the EU and US.
The shares were unmoved following the announcement.
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Our view
Ultimately, we're supportive of Amazon's proposed stock split and buyback aspirations. Stock splits don't change the picture too much for existing shareholders, as the value of their holding won't change. Instead, it makes each individual share less expensive, making it more accessible to everyday investors.
Giving itself permission to buy back huge swathes of its own stock is no bad move by Amazon either. We view the current valuation very undemanding. The final scale of the buyback might not be as big as suggested - less than half of the $5bn programme announced in 2016 (which the new programme replaces) has been repurchased to-date.
And away from technical changes to the shares, it's the wider investment case that should be considered.
Rising operating costs are outpacing revenue - reflecting increased investment in fulfilment capacity, higher wages and some effects from supply chain disruption. Some of that cost may be temporary, but a lot will linger.
An unexpected reversal in margins is never welcome. But Amazon has never been overly focussed on the bottom line.
We're happy to give newly installed CEO Andy Jassy the benefit of the doubt for now. Newer products are still showing very steady growth. The relatively new advertising proposition grew a third year-on-year. We also take comfort from the fact AWS (Amazon Web Services) is already showing rapid and profitable growth following investment earlier in the pandemic.
That's part of a broader shift in the overall revenue mix towards services. Total services, which includes things like Prime as well as AWS, accounted for around half of revenues last year. Growing this area of the business is behind the acquisition of MGM studios, which comes with a formidable content backlog, including the likes of James Bond. We view the deal as a competitively shrewd move. Pouring internally generated cash into new investment opportunities is more important than ever now.
The US retail business is increasingly running up against the law of large numbers. When you're only selling $1,000 of product a year, boosting sales by 40% is relatively easy. When your annualised sales reach $470bn, finding an extra $160bn of sales is pretty difficult.
That could be one reason we're approaching the end of Amazon's golden age. With high streets shut Amazon has been a natural home for consumers' spare cash, AWS services remote working, which has suddenly become the norm, and tech wizardry is all the more useful when we can't see friends and family in person. It's possible we're starting to see those tailwinds unwind - making growth more of a challenge in the years ahead. If costs consistency climb too that may make investors jumpy.
Amazon is a Pandora's box of excellent businesses. Conventional retailers are going to have to deliver some dramatic changes to compete with the uncontested king of e-commerce going forwards, while cloud computing provides long term opportunities to service the remote working and data revolutions. The big question over the next 12 months is whether it can capitalise on those opportunities at a reasonable cost.
Amazon key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Buyback and potential stock split announced (10 March 2022)
Amazon has authorised a $10bn share buyback, the programme doesn't have a set deadline. This replaces the previous $5bn programme announced in 2016, of which $2.12bn has been repurchased.
Amazon's board has also authorised a 20-for-1 stock split. This needs shareholder approval at the Annual Meeting, scheduled to take place on 25 May 2022.
The shares rose 6.6% in after-hours trading.
Fourth quarter results
Amazon reported fourth quarter net sales of $137.4bn, up 10% ignoring the effect of exchange rates. That was slightly behind analyst expectations. Growth reflected a strong performance from Amazon's Cloud business, Amazon Web Services.
Increased investment meant operating profit almost halved to $3.5bn. Andy Jassy, CEO said ''As expected over the holidays, we saw higher costs driven by labour supply shortages and inflationary pressures, and these issues persisted into the first quarter due to Omicron''.
North American sales rose 9% to $82.4bn, but increased investment meant operating profit swung to a $206m loss from profits of $2.9bn the previous year. International reported net sales growth of 3%, reaching $37.3bn. Operating profit fell dramatically to a loss of $1.6bn. Amazon Web Services (AWS) had a more positive quarter, with sales rising 40% to $17.8bn, profits rose 46% to $5.3bn.
Total operating costs climbed to $134bn from $118.7bn, including a 21.5% increase in fulfilment expenses.
Capital expenditures rose 27.7% to $18.9bn. On a trailing twelve month basis, free cash flow fell to a $9.1bn outflow, compared to a $31.0bn inflow at the start of 2021.
Next quarter, Amazon said ''net sales are expected to be between $112.0 billion and $117.0 billion, or to grow between 3% and 8% compared with first quarter 2021''. Operating income is expected to be between $3.0 - $6.0bn, compared with $8.9 billion in first quarter 2021.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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