Category: Stock Market

The tech sector has been well and truly out of form this year. For example, the S&P ASX All Technology index is down a sizeable 32% in 2022.

While this is disappointing, it could have dragged a number of ASX tech shares down to very attractive levels for a patient long term focused investors.

Two such shares are listed below. Here’s why Goldman Sachs rates them highly at present:

Megaport Ltd (ASX: MP1)

The first ASX tech share that could be in the buy zone according to Goldman Sachs is Megaport.

It is the leading global provider of elastic interconnection services. Megaport’s business is hard to get your head around. But essentially, its software layer provides users with an easy way to create and manage network connections. Through the Megaport network, businesses can then deploy private point-to-point connectivity between any of the locations on its global network infrastructure.

Importantly, with the structural shift to the cloud continuing, Megaport appears well-positioned to benefit from increasing demand and higher spending on enterprise networking.

Goldman Sachs certainly expects this to be the case. The broker believes Megaport’s “opportunity for further growth is immense [with] GSe A$129bn p.a. spent on fixed enterprise networking across MP1 geographies.”

The broker has a buy rating and $10.30 price target on its shares.

Xero Limited (ASX: XRO)

Another ASX tech share that could be a top option for investors according to Goldman Sachs is Xero.

It is a cloud accounting platform provider with ~3.3 million subscribers globally. From these subscribers, the company recently reported annualised monthly recurring revenue (AMRR) of NZ$1.2 billion. This was up 28% year over year.

And while Xero’s subscriber numbers appears very large on paper, it is still only a fraction of its addressable market. Management estimates that it has an addressable market of 45 million subscribers, which means it has only captured 7.3% of its market so far.

Goldman Sachs is a big fan of Xero and believes the company is “well-placed to navigate this uncertainty given the stickiness & importance of its software.”

The broker has a buy rating and $111.00 price target on Xero’s shares.

The post Goldman Sachs names 2 ASX tech shares to buy now appeared first on The Motley Fool Australia.

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More reading

• 3 hot small-cap ASX growth shares Firetrail’s backing right now
• 5 things to watch on the ASX 200 on Tuesday
• Here are the 10 most shorted ASX shares
• Why Lake Resources, Lovisa, Megaport, and St Barbara shares are dropping
• Megaport share price slumps 10%: Is it a buy now?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended MEGAPORT FPO and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended MEGAPORT FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Investors snapping up shares in loss-making ASX companies might be short-changing themselves in the hunt to find the next millionaire maker, according to experts.

Equities research platform MST Marquee has reportedly established that rigorously investing in unprofitable shares can be a surefire way to erode wealth.

Keep reading to find out how a portfolio full of loss-makers could have performed since the turn of the century.

Why do Aussies love loss-making ASX shares?

Research conducted by MST Marquee, as cited by the Australian Financial Review, found strictly investing in only non-profitable ASX shares could have seen a shareholder lose 99.7% of their invested capital since 2000.

The research company is said to have built a model portfolio valued at $100 at the turn of the century.

The portfolio was then rebalanced annually, according to previous reporting, to remove companies that had since posted their maiden profits.

As of 2011, the initial $100 investment had eroded to be worth just $4.10. And, nowadays, it holds only 24 cents of value.

That’s what an average compound loss of 23% each year will do, folks.

But it wasn’t all bad.

MST Marquee senior research analyst Hasan Tevfik reportedly said the portfolio gained a whopping 37% in 2009. It was also said to have surged 60% between March 2020 and October 2021.

Interestingly, the risk of long-term losses apparently hasn’t been enough to deter investors from buying unprofitable ASX shares.

Many market watchers appear to be on the hunt for the ‘next big thing’, with the S&P/ASX 300 Index (ASX: XKO) seemingly reflecting such ambition. Fifty ASX 300 shares were reportedly found to be posting red balance sheets right now.

Tevfik said, courtesy of the AFR:

Despite the dismal track-record, investors still buy these profitless companies … [they could] be hoping that a few of these birds will develop wings and start soaring like an eagle, perhaps.

While our birds-without-wings portfolio will be buying these stocks, we suggest other investors tread with caution.

However, there are likely plenty of diamonds to be found in the rough.

Indeed, Pilbara Minerals Ltd (ASX: PLS) only posted its maiden profit last month.

Shares in the ASX lithium favourite have increased ten-fold over the last five years, rising from 49 cents in September 2017 to close Wednesday’s session at $4.94.

The post Here’s what can happen when you buy up ASX shares in loss-making companies appeared first on The Motley Fool Australia.

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More reading

• Goldman Sachs names 2 ASX tech shares to buy now
• These could be 2 of the most exciting ETFs for ASX investors to buy
• Which ASX lithium shares are performing best in 2022?
• Is the party just getting started for ASX 200 coal shares?
• Morgans names 2 ASX growth shares to buy

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re interested in exchange traded funds (ETFs), then you may want to check out the two ETFs that are listed below.

These ETFs are among the more exciting options out there and could be suitable for investors with a higher tolerance for risk.

Here’s what you need to know about them:

BetaShares Crypto Innovators ETF (ASX: CRYP)

The first ETF for investors to look at is the BetaShares Crypto Innovators ETF.

This ETF could be a good option if you believe that the cryptocurrency industry is here to stay and will thrive in the future.

Rather than investing in coins, this fund allows investors to invest in companies that are heavily involved in the industry. These are companies that provide mining equipment, trading platforms, and even the mining of bitcoin and other cryptocurrencies.

Among the shares you’ll be owning a slice of are crypto mining hardware manufacturer Canaan, crypto trading platform Coinbase, and crypto mining company Riot Blockchain.

BetaShares Global Cybersecurity ETF (ASX: HACK)

Another exciting ETF for investors to consider is the BetaShares Global Cybersecurity ETF.

This ETF gives investors exposure to the cybersecurity sector, which continues to benefit from the shift of infrastructure to the cloud and the rising threat of cyberattacks.

In respect to the latter, with online threats only getting greater each year, demand for cybersecurity services has been tipped to continue increasing for a long time to come.

This will be good news for the shares in the ETF, which includes many of the leaders in the global cybersecurity sector. Among the companies you will be owning a slice of are Accenture, Cisco, Cloudflare, Crowdstrike, Okta, and Palo Alto Networks.

The post These could be 2 of the most exciting ETFs for ASX investors to buy appeared first on The Motley Fool Australia.

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More reading

• Don’t miss out on these high quality ASX ETFs
• 2 excellent ETFs for ASX investors to buy this month
• I rate these top ASX growth shares as buys in September
• 2 popular ETFs that could be buys for ASX investors
• Why I’d buy these 2 ASX ETFs right now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended BETA CYBER ETF UNITS and Betashares Crypto Innovators ETF. The Motley Fool Australia has positions in and has recommended BETA CYBER ETF UNITS. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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ASX lithium shares have become market darlings over the past couple of years. They’ve arguably replaced technology shares, which were the ‘in thing’ before the COVID-19 pandemic turned everything upside down.

The price of lithium has risen astronomically as the world continues to grow a whole new industry in electric vehicle (EV) manufacturing.

In fact, the value of lithium carbonate hit a record high this month at US$71,370.50 per tonne.

According to Trading Economics, that’s an 80% increase year to date “as surging demand coincides with lower supply”.

No wonder ASX lithium shares are garnering a lot of attention.

Which ASX lithium shares are performing best right now?

Let’s do a snapshot of how some of the largest ASX lithium shares (by market capitalisation) are performing year to date in 2022.

• The Pilbara Minerals Ltd (ASX: PLS) share price is 40.3% higher (market cap $14.59 billion)
• The Allkem Ltd (ASX: AKE) share price is 39.9% higher ($10.17 billion)
• The Core Lithium Ltd (ASX: CXO) share price is 123% higher ($2.5 billion)
• The Sayona Mining Ltd (ASX: SYA) share price is 78.6% higher ($2.2 billion)
• The Lake Resources NL (ASX: LKE) share price is down 2.75% ($1.45 billion).

Here’s a snapshot of how some of the junior ASX lithium shares are doing this year. Always remember, buying nano, micro and small-cap shares can be risky business, so tread carefully and do your research.

• The Global Lithium Resources Ltd (ASX: GL1) share price is 121% higher (market cap $535 million)
• The Anson Resources Ltd (ASX: ASN) share price is 160.7% higher ($396.74 million)
• The Arizona Lithium Ltd (ASX: AZL) share price is down 29.2% ($209.66 million)
• The Iris Metals Ltd (ASX: IR1) share price is 186.2% higher ($198.94 million)
• The Ragusa Minerals Ltd (ASX: RAS) share price is 300% higher ($35.34M).

Business performance vs. share price performance

As seasoned investors know, the performance of a business doesn’t necessarily correspond with the performance of its share price and vice versa. Annoying, right?

This is especially the case with young, growing companies that the market is excited about. Investors can sometimes bid the share price up on expectations of future profits, not current profits.

Share price growth doesn’t necessarily indicate great revenue and profit, or superior management. So when assessing ASX lithium shares for investment, you can’t just look at what the share prices have done lately. You need to get under the hood and check the inner workings of each company are sound.

With reporting season just behind us, let’s compare a few metrics on the two largest ASX lithium shares.

Pilbara Minerals FY22 results

• Revenue up 577% year-over-year (yoy) to $1.2 billion
• EBITDA of $814.5 million, up from $21.4 million in FY21
• Statutory net profit after tax (NPAT) of $561.8 million, up from a loss of $51.4 million loss in FY21
• Share price went up 53.4% over FY22
• Price-to-earnings (P/E) ratio of 17.86 compared to 9.51 for the sector today.

Allkem FY22 results

• Revenue up 800% yoy to US$770 million
• EBITDAIX of US$513.1 million
• Consolidated NPAT of US$337 million, up from a loss of US$89.5 million in FY21
• Share price went up 54.8% over FY22
• P/E ratio today of 17.53 compared to 9.51 for the sector today.

Why is the value of lithium rising?

The reasons behind this month’s record lithium price are clear.

According to Trading Economics analysis:

Added stimulus and cash incentives by local Chinese governments spurred growth in demand of electric vehicles in the world’s second largest economy, notching a 100% year-on-year increase in August.

In the US, demand for electric vehicles is set to increase as the newly passed “Inflation Reduction Act” extends tax breaks for new electric vehicle purchases.

On the supply side, the energy crisis in China brought by record-setting heat waves led multiple lithium producers in Sichuan to suspend operations, adding to the upside of soaring lithium costs in the near-term.

Scarcity led auto manufacturers with large bets on battery electric vehicles to compete for long-term supply contracts, including Ford and Stellantis. Also, electric vehicle giant Tesla mulled building its own lithium refinery in Texas.

The post Which ASX lithium shares are performing best in 2022? appeared first on The Motley Fool Australia.

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More reading

• Is it too late to invest in ASX lithium shares? Apparently not…
• These 8 companies joined the ASX 200 on Monday. Here’s how they’re performing
• Here are the top 10 ASX 200 shares today
• These three ASX lithium shares defied Wednesday’s selloff
• Here are the 3 most heavily traded ASX 200 shares on Wednesday

Motley Fool contributor Bronwyn Allen has positions in Allkem Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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S&P/ASX 200 Index (ASX: XJO) coal shares have soared ahead in the year to date, but could they go even higher?

Coal explorers on the ASX 200 include New Hope Corporation Limited (ASX: NHC) and Whitehaven Coal Ltd (ASX: WHC).

Let’s take a look at the outlook for ASX 200 coal shares.

Coal prices to rise

On Tuesday, New Hope shares soared after the company reported a 1,138.8% lift in profit in FY22. The major driver for this result, as my Foolish colleague James noted on the day, was higher coal prices.

In Tuesday’s report, New Hope said coal pricing is “at record levels”. The company noted demand is outstripping supply and a “limited supply response is expected”. New Hope said:

With global energy demand to remain flat to 2030, stronger longerterm pricing is expected to remain considering constrained supply.

New Hope noted there is a “robust market demand” for high energy and lower emission thermal coal, adding that the Russia and Ukraine conflict has “further tightened supply.

The company said even if global demand reduces, New Hope’s operations “remain resilient. New Hope said:

The company is focused on remaining in the lowest quartiles of the global cost curve, maximising shareholder returns.

Whitehaven Coal also highlighted the “record” thermal coal prices in its FY22 results presentation in late August. Whitehaven said the “strong demand” and tight supply” are underpinning these price rises.

Events over the past two years have caused a shift in global trade flows and tightened the supply of all coal products, leading to strong demand and record high prices – especially for
high-CV coal.

The company reported a record $3.1 billion EBITDA and $2 billion net profit after tax (NPAT) in FY22.

Share price snapshot

ASX coal shares are having a stellar year. The Whitehaven Coal share price has exploded 243% year to date, while it has risen 214% in the past year.

Meanwhile, the New Hope share price has risen 176% in the year to date and 187% in the past year.

For perspective, the S&P/ASX 200 Energy Index (ASX: XEJ) has risen 40% in the past year and 35% in the year to date.

The post Is the party just getting started for ASX 200 coal shares? appeared first on The Motley Fool Australia.

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More reading

• Brokers name 2 ASX dividend shares to buy
• Here are the top 10 ASX 200 shares today
• 3 ASX 200 shares paying out ‘special’ dividends in 2022
• Why is the Whitehaven share price soaring another 5% on Wednesday?
• Dividend beasts: 5 ASX shares with monster yields and no debt

Motley Fool contributor Monica O’Shea has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re interested in growth shares, then read on. Morgans has recently named a number of shares that it is very positive on.

Two growth shares that have received the thumbs up are listed below. Here’s what it is saying about them:

Pro Medicus Limited (ASX: PME)

Morgans is a big fan of this health imaging technology company and has suggested that investors take advantage of any share price weakness.

It likes the company due to its strong long term growth potential thanks to the quality of its offering and industry tailwinds. It commented:

Pro Medicus is a leading healthcare end-to-end imaging software and service provider, servicing a number of the world’s largest imaging centres and health care groups. We like the space, with high single digit organic volume growth and long-term industry tailwinds. Profitability in the business is backed up by long-term contracted revenues with some of the world’s largest hospital systems and growing pipeline of tenders which we view will provide continued growth over the medium to long term. We view the business as best-in-class as it heads into CY22 with a step-change in billable contracts following the significant volume and value of contracts signed over the last 12-18 months. The recent market weakness in high growth tech names has provided an opportunity for reasonable entry points.

Morgans has an add rating and $58.18 price target on the company’s shares.

Webjet Limited (ASX: WEB)

Another ASX growth share that could be a buy according to Morgans is Webjet. The broker believes that the online travel agent will come out of the COVID crisis in a much strong position. It explained:

Based on our forecasts, WEB is trading on an FY24 recovery year PE which is at a discount to its five-year average PE (pre-COVID). Its WebBeds (B2B) business is highly leveraged to the northern hemisphere summer holiday season which is forecast to be strong. Webjet OTA is leveraged to ANZ domestic and international travel. Management also wasted a crisis and cost reduction initiatives will reduce its cost base by 20% across the group once the business returns to scale.

Morgans has an add rating and $6.40 price target on Webjet’s shares.

The post Morgans names 2 ASX growth shares to buy appeared first on The Motley Fool Australia.

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More reading

• Here are 3 top ASX growth shares that analysts rate as buys
• Looking to buy ASX shares? Expert reveals ‘one metric to assess the quality of a business’
• Here are the top 10 ASX 200 shares today
• Why is the Webjet share price heading 5% skywards on Tuesday?
• Broker names 2 of the best ASX shares to buy now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Pro Medicus Ltd. The Motley Fool Australia has positions in and has recommended Pro Medicus Ltd. The Motley Fool Australia has recommended Webjet Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The ASX may be closed today. But that doesn’t mean investors can’t enjoy some returns from their ASX shares. So let’s talk about the Rio Tinto Limited (ASX: RIO) dividend.

Amongst all of the ASX dividend shares that have paid out shareholder income this year, none have arguably been as exciting as resource shares like Rio. The past year or so has seen record high commodity prices. Oil, coal, and gas have all seen massive gains. As have other commodities like iron ore.

This has translated into massive dividend payments from mining and drilling giants like BHP Group Ltd (ASX: BHP), Woodside Energy Group Ltd (ASX: WDS), and, of course, Rio Tinto.

Rio revealed its FY22 full-year earnings report back in July. In this, the miner declared an interim, fully franked dividend of US$2.76 per share. That’s $3.837 in our dollars. Rio shares traded ex-dividend for this payment back on 11 August. And investors will be receiving the paycheque very soon.

The Rio Tinto dividend is inbound

The original payment date was set for today, 22 September. But the public holiday today commemorating the death of Queen Elizabeth threw a spanner in the works. Last week, Rio told investors that the dividend pay date is still today. However, it added the following:

Due to the National Day of Mourning declared by the Australian Federal Government to commemorate Queen Elizabeth II, 22 September 2022 is now a non-business day for banking and ASX purposes.

As a result, payments for Rio Tinto Limited shareholders who have elected to receive their dividends via direct credit in Australian dollars will be processed on 21 September 2022.

So perhaps investors will still receive their cash today. But due to the holiday, many investors might have gotten a one-day early mark for their money, and seen the money come in yesterday. It’s also possible that for some investors, the cash will arrive tomorrow.

We do know for sure that any additional shares to be distributed under Rio’s optional dividend reinvestment plan (DRP) will be issued tomorrow.

Whatever happens, it’s certainly a good week for Rio Tinto investors.

At yesterday’s closing Rio Tinto share price, this ASX 200 mining giant had a dividend yield of 10.53%

The post Own Rio Tinto shares? It’s time to dig into your dividends appeared first on The Motley Fool Australia.

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More reading

• $18 billion of ASX dividends are being paid out this week. Here’s the lowdown
• Why China’s slowdown isn’t as bad as it looks for ASX 200 mining shares
• Down 19% since June, where to next for the Rio Tinto share price?
• Could the latest news out of China bode well for ASX 200 iron ore shares?
• Hanging out for your Rio Tinto dividend? Here’s the latest

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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While rates are rising fast, savings accounts and term deposits still can’t compete with the yields on offer with ASX dividend shares.

For example, two high yield ASX dividend shares that are rated as buys are listed below. Here’s what you need to know about them:

GQG Partners Inc (ASX: GQG)

The first ASX dividend share that has been tipped as a buy is fund manager GQG.

It has been tipped as a buy by analysts at Goldman Sachs, who see significant value in the company’s shares at the current level. They have a buy rating and $1.92 price target on them.

Goldman likes the company due to its strong investment performance and low fees. It highlights that the latter puts GQG in the lowest quartile among global peers. Another positive for Goldman, is that GQG’s co-founders have the majority of their net wealth invested in the company and its investment strategies.

As for dividends, Goldman is forecasting dividends per share of 8 cents in FY 2022 and 9 cents in FY 2023. Based on the current GQG share price of $1.51, this will mean yields of 5.3% and 6%, respectively.

National Australia Bank Ltd (ASX: NAB)

Another ASX dividend share that could be a good option right now for income investors is this banking giant.

NAB appears well-placed to profit in the current environment with rates rising and its significant liquidity. In fact, it is for these reasons that Citi recently upgraded its shares to a buy rating with a $32.75 price target. The broker believes that historic levels of excess liquidity will boost NAB’s net interest margin as interest rates rise rapidly.

In addition, Citi is expecting some attractive dividend yields from NAB’s shares. It is forecasting a $1.50 per share dividend in FY 2022 and then a $1.85 per share dividend in FY 2023. Based on the current NAB share price of $29.82, this will mean fully franked yields of 5% and 6.2%, respectively.

The post Analysts say these high yield ASX dividend shares are buys appeared first on The Motley Fool Australia.

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More reading

• NAB shares: Buy, hold, or fold?
• Here’s why I decided to buy each of the big 4 ASX 200 bank shares
• NAB shares: Boring or beautiful?
• Looking to buy CBA shares? Here’s how the bank’s balance sheet stacks up
• The NAB share price has gained 10% in 3 months. Too late to buy?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Insurance Australia Group Ltd (ASX: IAG) dividend should be landing in your bank accounts today.

Despite the ASX being closed due to the Queen of England’s memorial public holiday, the insurance giant went ahead with the dividend payment.

At yesterday’s market close, IAG shares finished at $4.44, down 1.11%.

For context, the S&P/ASX 200 Index (ASX: XJO) was deep in the red ahead of the US Fed Reserve meeting today.

The benchmark index fell 1.56% to 6,700.2 points.

Let’s take a look at what shareholders will be getting from the IAG dividend.

IAG pays out final dividend

On 12 August, IAG reported a relatively mixed performance in its full-year results for the 2022 financial year.

This led the board to declare the smallest dividend for more than a decade, not inducing during COVID-19.

As such, a partially franked final dividend of 5 cents per share will be paid on today to eligible shareholders.

This brings the full-year dividend to 11 cents apiece, which equates to a payout of 78.1% on reported NPAT.

IAG’s dividend policy is to distribute between 60% to 80% of NPAT excluding any after-tax earnings impact.

When calculating against the current share price, IAG is trailing on a dividend yield of 2.47%.

Investors who elected for the dividend reinvestment plan (DRP) will see a number of shares added to their portfolio. This was based on the volume weighted average price from 29 August to 2 September which resulted in $4.64 per share.

No DRP discount rate was offered to shareholders.

IAG share price summary

Whilst moving in circles during recent times, the IAG share price has gained more than 4% in 2022.

When looking at the last 12 months, its shares have travelled the other way to post a loss of 12%.

IAG has a price-to-earnings (P/E) ratio of 33.67 and commands a market capitalisation of roughly $10.95 billion.

The post The IAG dividend is hitting bank accounts today. What you need to know appeared first on The Motley Fool Australia.

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• IAG shares ‘highest quality’ in the sector: fundie
• Here’s how many IAG shares the company’s executives have been buying in the past 2 weeks
• Why is the next IAG dividend not fully franked?
• Here are the top 10 ASX 200 shares today

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Amazon (NASDAQ: AMZN) is no stranger to antitrust lawsuits. Just the other day, California filed a suit against Amazon alleging anticompetitive pricing policies. This filing isn’t the first time these allegations have come up, and it likely won’t be the last.

Because of the current environment, it’s not a far-fetched idea that Amazon could be split up voluntarily or by the government. It’s a worthwhile exercise to value each business segment of the company separately for two reasons. First, it could prepare investors for a split. Second, it also serves as a method to value the company and determine if it’s worth an investment today.

Let’s see how each segment is valued and if Amazon is worth your investment dollars.

A large business with multiple segments

Amazon’s business can be split into two main segments: commerce and cloud computing. Commerce is much broader than the website you order items from. It also includes advertising, third-party seller services, and subscription products. Cloud computing, better known as Amazon Web Services (AWS), provides the infrastructure to process workloads through the cloud.

The commerce segment also generates the bulk of Amazon’s revenue. Over the past 12 months, the company brought in $485.9 billion in sales overall, and 85% of that came from commerce. However, that segment hasn’t made any money over the past year. It lost $7.1 billion; whereas, AWS made $22.4 billion in operating income.

Those figures group all of the many commerce segments together. Amazon doesn’t break out its expenses for each segment, but it does break out its sales.

Segment	Q2 Net Sales	Q2 YOY Growth	Share of   Total Revenue
Online stores	$50.9 Billion	0%	42%
Physical stores	$4.7 Billion	13%	4%
Third-party seller services	$27.4 Billion	13%	23%
Subscription services	$8.7 Billion	14%	7%
Advertising services	$8.8 Billion	21%	7%
Amazon Web Services (AWS)	$19.7 Billion	33%	16%
Other	$1.1 Billion	135%	1%

Source: Amazon. YOY = year over year.

This table provides valuable insights. First, its online-store segment didn’t grow its sales but is still the largest. Second, AWS is the fastest-growing segment (the “other” segment is volatile, so growth likely isn’t sustainable) and the second largest. Lastly, advertising services still grew 21% year over year during a difficult ad environment.

Overall, Amazon’s quarter was strong; it was just dragged down by its largest segment having difficult comparisons, because 2021’s second quarter was still during the height of COVID-19. But should the company need to be split, it’s challenging to determine which segments would go where.

AWS would likely need to be its own entity because it is unrelated to commerce. Advertising could be seen as a conflict of interest, as it should theoretically be a neutral marketplace. One seller could pay Amazon to place its product above other similar ones, even if it is lower rated or more expensive. The rest of the divisions — online stores, physical stores, third-party services, and subscriptions — could remain a separate company.

That leaves three separate businesses: cloud computing, advertising, and commerce. Now it’s time to determine what each business is worth.

Valuation by parts

To determine what each entity is worth, I’ll apply a valuation comparable to companies that perform services similar to the newly formed Amazon businesses. While this approach has flaws, it’s a good way to estimate a valuation for each business.

First, investors could compare the commerce business to retail giants like Target Corporation (NYSE: TGT) or Wal-mart Stores, Inc.(NYSE: WMT). These two trade for 0.7 and 0.6 times sales, respectively. While these two companies have a more expensive physical footprint, Amazon has to pay for delivery. However, unlike Amazon’s commerce business, Walmart and Target are consistently profitable. Because of this, I will apply a valuation of 0.5 times sales to Amazon’s commerce business.

For advertising, The Trade Desk (NASDAQ: TTD) is a similar business. Its ad-tech platform connects buyers to sellers to ensure advertisers get the best results. Amazon’s platform has similar capabilities but also deals directly with ads, unlike The Trade Desk. Because of this, I’m going to discount this business significantly. The Trade Desk is valued at 22 times sales, but I’m going to cut that in half for Amazon’s ad business to 11 times sales.

Lastly, AWS is likely the most valuable. It’s growing quickly and is highly profitable. Its two main competitors, Microsoft’s (NASDAQ: MSFT)Azure and Alphabet’s (NASDAQ: GOOGL)(NASDAQ: GOOG)Google Cloud, aren’t stand-alone companies, so a valuation can’t be deduced from them.

There aren’t many businesses like it, but Adobe Inc.(NASDAQ: ADBE) comes close. The product isn’t close to AWS, but its subscription revenue stream and high operating margins (35%) are similar to AWS. Adobe trades at 8.5 times sales, which is influenced by recent acquisition news. Before then, it traded at 11 times sales. I’ll apply a valuation of 13 times sales to AWS to adjust for this drop and account for AWS’ faster sales growth.

Now, let’s see the value of all three businesses.

Business	TTM Revenue	P/S Valuation	Business   Valuation
Commerce	$379.9 Billion	0.5	$189.9 Billion
Advertising	$33.9 Billion	11	$372.9 Billion
AWS	$72.0 Billion	13	$936.0 Billion

Source: Amazon. P/S = price to sales. TTM = trailing 12 months.

Now, let’s add up those three segments. Using this method, Amazon’s entire business is worth $1.5 trillion. However, its current market cap is $1.26 trillion. That means, according to my valuation method, the company’s stock is currently undervalued by 19%. 

So, if Amazon gets broken up by regulators or through its own decision, investors will likely make a quick profit through a split. But that action might not happen.

One thing that is certain is that investors can purchase Amazon’s stock today. With its recent price movement, it looks undervalued, and investors should consider establishing a position and holding it for an extended period, even if it gets broken up.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Here’s why splitting up Amazon could mean huge returns for shareholders appeared first on The Motley Fool Australia.

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• Is Tesla stock recession-proof?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Adobe Inc., Alphabet (C shares), and The Trade Desk. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Adobe Inc., Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, Target, The Trade Desk, and Walmart Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool Australia has recommended Adobe Inc., Alphabet (A shares), Alphabet (C shares), Amazon, and The Trade Desk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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