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Amazon - buyback programme announced

Amazon has authorised a $10bn share buyback, the programme doesn't have a set deadline.

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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.

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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.

We can't knock progress in Advertising and Amazon Web Services, but there are some things to consider.

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. The group has a sizeable cash pile on hand to fund investment and 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 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. These should be far higher margin, although you wouldn't know it from the way profits are going.

Amazon's approach has always been to pour internally generated cash into new investment opportunities wherever possible. That's more important than ever now, because we suspect 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 - especially given the stock's valuation.

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.

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 10th March 2022