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We mentioned last week that Amazon is doing a stock split and a $10 billion share buyback this year. I wanted to focus today on the buyback part of the announcement.
Amazon only started to really become profitable in 2018. Online retail is a capital intensive business that requires large scale before becoming profitable. In truth, it was the development of the incredible Amazon Web Services (AWS) business that made the difference.
AWS has made so much money that it has allowed Amazon to scale their online retail business as they please. Now it's funding large share buyback schemes. It has also most likely saved the share price over the last three months. If Amazon was only an online retail business, I believe its share price would have been bean beaten down like those of PayPal, Netflix, Shopify and Zoom. The darlings of the lockdown have not had an easy time as the world returns to 'normal'.
Instead, Amazon has mostly held its level. Although it avoided a collapse, the Amazon share price has been flat for nearly two years now. That is why I believe this is a good time for them to buy back shares. If the timing is right, share buybacks can be a brilliant place to allocate capital.
