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1 Green Flag for Amazon in 2022, and 1 Red Flag

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Investors will want to look beyond Amazons stock split and more into its business prospects for 2022.

Amazon (AMZN 4.40%) has been getting a lot of attention in recent days after management announced a 20-for-1 stock split. While it's interesting news, we aren't going to get into the details of that decision or its implications here.

Instead, we are going to focus on what may be bigger news for investors as it relates to the potential of this company: Amazon's business prospects for the rest of 2022. Specifically, investors should be focusing on one factor that will work as a tailwind in the coming year and one that is likely to work against the e-commerce giant. 

Image source: Getty Images.

Green flag: Amazon is taking a bite out of this $763 billion market 

Some of you may be surprised to learn that Amazon has become a formidable player in the advertising market. Indeed, in its most recent quarter ended Dec. 31, Amazon generated $9.7 billion in advertising revenue. That was 33% higher than in the same quarter a year ago. The company has grown so much in this relatively nascent category of its operations that it generated over $30 billion in sales in 2021.

Advertising is a lucrative business. Once a company like Amazon invests in developing the capability to offer the service, there are few incremental costs associated with serving ads over the long term. As such, growth from this segment should help lift Amazon's profit margins, which have been notoriously low for a long time. 

It's not surprising that marketers are interested in advertising on Amazon. The e-commerce platform is home to hundreds of millions of buyers who have their payment information on file and access to fast, free shipping. There are arguably no better-qualified prospects than the folks browsing Amazon's website or app. If shoppers see an ad for a product they like, they are as little as one click away from buying. 

And even though Amazon earned over $30 billion in ad sales in 2021, it has lots of room to expand this segment further. Overall, marketers spent $763 billion globally in 2021. That was 22.5% higher than the prior year. Amazon is taking a growing share of an expanding industry, a green flag for 2022 to be sure.

Red flag: Economic reopening could hurt sales on 

Retail sales surged for Amazon at the pandemic onset. Hundreds of millions of folks wanted to avoid shopping in person, and Amazon was the obvious alternative. Fortunately, several effective vaccines against COVID-19 were developed, and billions of doses have gone into people's arms. That's giving folks the confidence to return to some of their pre-pandemic habits, which include shopping in person at their favorite stores. 

As a result, retail sales growth slowed significantly for Amazon in the latest quarter. In its quarter ended Dec. 31, online sales rose by just 1%. In contrast, that figure rose by over 37% for three quarters before economic reopening gained momentum in the second quarter of 2021.

Further, the trend could get worse in 2022. With an arsenal of vaccines, treatments, and testing, most governments are opting to keep economies open even in the face of rising infections. That means spending on Amazon's website might decrease in 2022, which is a red flag to be sure.

Investor takeaway 

Overall, it seems that the bears have had their way with this stock for too long. Amazon's stock price is down 11.5% so far in 2022 and is now trading at its lowest price-to-earnings multiple in five years. Investors can feel good about adding Amazon shares at these prices despite the headwinds.

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