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

On July 21, Amazon (NASDAQ: AMZN) announced that it would buy One Medical in a deal valued at $3.9 billion. Its purchase of a tech-powered healthcare company is a step in a direction that many investors have been calling for Amazon to take.

Healthcare services promise to be more profitable than Amazon's e-commerce segment, which has been weighing on the company's profit margins. In contrast, its web services segment has carried the load. Let's look at how this move combines with a few more recent changes to tell a story of an Amazon that's emphasizing profitability.

Investing in a tech-infused healthcare services business

E-commerce sales have always been a thin-margin business for Amazon. That could explain why its operating profit margin has stayed below 10% for the past 10 years. To make matters worse, it's becoming even more expensive to sustain that segment. As inflation has taken hold, Amazon's labor, fuel, and fulfillment input costs have increased substantially in the last year.

AMZN Operating Margin (Quarterly) data by YCharts.

In its most recent quarter, which ended on March 31, Amazon's shipping costs increased by 14% while its number of units shipped remained unchanged. In other words, shipping each item costs Amazon roughly 14% more. Given the relatively negative outlook for e-commerce sales, investors can be pleased with Amazon's latest decision to purchase the healthcare services company.

According to Neil Lindsay, senior vice president of Amazon Health Services, in a press release:

We think health care is high on the list of experiences that need reinvention. Booking an appointment, waiting weeks or even months to be seen, taking time off work, driving to a clinic, finding a parking spot, waiting in the waiting room then the exam room for what is too often a rushed few minutes with a doctor, then making another trip to a pharmacy -- we see lots of opportunity to both improve the quality of the experience and give people back valuable time in their days.

Moreover, service businesses tend to be higher-margin and less capital-intensive. Costs also tend to be variable rather than fixed, protecting any decreases in revenue. That could be more of what investors like to see from Amazon as its fulfillment centers require large capital investments up front and are expensive to maintain even if sales fall. That may explain why operating income fell to $3.7 billion in the most recent quarter from $8.9 billion in the same quarter the prior year.

Shareholders show their approval

This purchase follows a story by The Wall Street Journal that said Amazon was reducing the number of private-label items it sells on its website. Those products tended to be lower-margin, lower-priced items that were becoming more expensive to fulfill. The business was also causing Amazon regulatory scrutiny, because it was said to be competing against third-party sellers that list similar products on the site.

Investors are cheering these recent moves; Amazon's stock has been up 12.7% in the past month. Nevertheless, many hope this is just the beginning with similar decisions ahead.

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

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

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Parkev Tatevosian 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 Amazon. The Motley Fool Australia has recommended Amazon. 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.

Investors have mixed feelings about eBay (NASDAQ: EBAY). The e-commerce website and platform thrived at the pandemic's onset when hundreds of millions wanted to avoid shopping in person. As a result, sales and customer signups surged. The economic reopening has had the opposite effect. After being cooped up at home for over a year, people want to get out of the house. 

However, it's not all bad news for eBay from now on. The company is implementing a strategy to boost revenue, even as customer spending is falling. Let's take a closer look at eBay's green and red flags below. 

Green flag: Increasing the take rate

Notably, eBay does not own any inventory for sale on its platform. Instead, it encourages buyers and sellers to meet on its website to make transactions. eBay makes money by taking a percentage of each sale (its "take rate").

Similarly, eBay leaves shipping and handling to buyers and sellers. That way, it doesn't need to own or operate fulfillment centers. It's an asset-light business model that works to deliver higher profit margins than if eBay were to participate in owning inventory or fulfillment centers.

Indeed, eBay's operating profit margin in the past decade has increased from 20.5% to 29.6%. Meanwhile, rival Amazon, which famously owns its fulfillment network, generated a measly operating profit margin during the same period.

EBAY Operating Margin (Annual) data by YCharts. 

The good news for eBay investors is that the company has been increasing its take rate in recent quarters. Between the fourth quarter of 2020 and the first quarter of 2022, eBay's take rate rose from 10% to 12.1%. Furthermore, considering that Etsy, a competitor with a similar business model, has sustained and increased its take rate in its previous five quarters at over 17%, suggests that eBay has room to expand its take rate further. 

eBay's rising transaction take rate has prevented revenue from falling as consumers return to shopping in person. The potential for more increases on this front is surely a green flag. 

Red flag: Declining customer spending

As mentioned earlier, people want to leave their homes and shop more in person. That means less money is available to spend at online stores like eBay. As a result, eBay's gross merchandise value (GMV), a metric that measures overall customer spending on its site, has declined for four consecutive quarters, starting with Q2 2021.

GMV fell from $24.1 billion in Q1 2021 to $19.4 billion in Q1 2022. The dramatic fall is not entirely due to economic reopening. The first quarter of 2021 held a major fiscal stimulus package, which boosted consumer spending in the U.S.

Still, the economic reopening is a significant headwind for eBay. Folks have more options on what to do with their time and money, and they're choosing to take dollars away from eBay and allocate them elsewhere. There's no telling how far or how long this transition will be, adding an element of risk to the situation.

This red flag can primarily explain why eBay's stock is off 47% from its highs. While the risk should not be ignored, it's no reason for shareholders to sell eBay stock. The majority of the bad news is arguably priced into the stock, while the potential to continue increasing the take rate could boost revenue, even as customer spending falls. 

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

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Parkev Tatevosian has positions in eBay. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon and Etsy. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended eBay and has recommended the following options: short July 2022 $57.50 calls on eBay. The Motley Fool Australia has recommended Amazon. 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.

Amazon (NASDAQ: AMZN) has gone through a volatile stretch over the last few years. The surge in customers and sales at the pandemic's onset has been followed by decelerating growth and rising costs. Amid all of that was a change in CEOs and a stock split.   

But none of the above are reasons to buy. Instead, the green flag I will discuss is the massive customer commitments it has for its lucrative Amazon Web Services (AWS) segment, the primary driver of Amazon's profitability these days.

$89 billion worth of signed contracts

As of March 31, Amazon's web services segment has contracts with customers for a total value of $88.9 billion. In other words, customers are committed to spending $89 billion on Amazon Web Services over the next few years. To put that figure into context, in its most recent quarter (ended on March 31), AWS generated revenue of $18.4 billion. That was a 37% increase from the same quarter in the prior year. What's more, it was an acceleration of the 32% growth it achieved in the same quarter of last year. Note that contractual obligations turn into revenue as customers use the service they agreed to buy.

Significantly, on that $18.4 billion in AWS revenue, Amazon earned an operating income of $6.5 billion. Amazon's other two segments, North America and international, generated an operating loss of $1.6 billion and $1.3 billion, respectively, in the quarter ended in March. These two segments are suffering the effects of economic reopening as consumers spend more of their money at brick-and-mortar retailers. Besides the losses in this most recent quarter, the two segments are notoriously lower-profit-margin businesses.

AMZN Operating Margin (Annual) data by YCharts

It's great news for Amazon that its more profitable segment is accelerating revenue growth and has a massive backlog of customer demand to fulfill. While its other segments may continue facing headwinds from the economic reopening, AWS continues to thrive. Indeed, the growth of AWS to a more considerable portion of Amazon's overall business has boosted its operating profit margin over the last decade. 

A great time to buy Amazon's stock 

That's creating an opportunity for long-term investors. The market has punished Amazon's stock, which is down 41% off its highs in 2021. Investors are concerned about decelerating growth of retail sales domestically and internationally. However, that might arguably be overlooking where the value comes from in Amazon's stock. AWS is where the bulk of profits will come from, and that segment is accelerating.

AMZN PE Ratio data by YCharts

Amazon is trading at a price-to-earnings ratio of 53, near the lowest that investors have been able to buy Amazon stock in the last five years. The worries over its online sales deceleration have created an excellent opportunity for long-term investors to buy Amazon stock -- a green flag, to be sure. 

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

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Parkev Tatevosian has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon. The Motley Fool Australia has recommended Amazon. 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.

Meta Platforms (NASDAQ: META) held an internal conference on June 30, during which CEO Mark Zuckerberg told employees to brace for impact. The social media giant that has turned into a metaverse business has, for several quarters, warned investors that it faces headwinds that are hurting its ability to grow revenue. 

Those include changes from Apple (NASDAQ: AAPL) that make it more difficult for Meta to track its users across apps. Rising competition from short-form video site TikTok has also forced Meta to make adjustments, hurting sales in the near term. Let's look at the recent revelation and determine if investors should jump ship and sell the stock now. 

Meta Platforms takes austerity measures amid slowing growth

One of the significant insights from reports of the meeting was Meta's reduced plans for hiring. The company had initially planned to hire 10,000 engineers. It has now reduced that goal to between 6,000 and 7,000. And the company is increasing performance goals, making work more challenging for existing staff.

Zuckerberg admitted this might cause some employees to quit, and that self-selection is something he said he would be totally fine with. Instead of outright layoffs, it looks like Meta is raising work standards. The result could be improved performance by many workers, while others quit.

"Part of my hope by raising expectations and having more aggressive goals, and just kind of turning up the heat a little bit, is that I think some of you might decide that this place isn't for you, and that self-selection is OK with me," Zuckerberg said.

The increased focus on cutting costs is no surprise considering earlier updates from Meta Platforms suggesting the slowest revenue growth in the company's history. In its most recent quarter, revenue increased by 7% from the same quarter in the prior year. Management expects revenue to be flat in the upcoming quarter.

META revenue (quarterly YoY growth). Data by YCharts.

For years, the company has benefited from collecting information on its users across apps and then using that data to sell targeted advertising. Marketers were willing to pay more for this type of advertising because it offers more precision and less waste. No longer were restaurants in San Diego paying for ads shown to folks in Boise, Idaho.

Another headwind is resulting from Meta's adjustment to changing consumer tastes. Folks are increasingly engaging with short-form videos in favor of photos. Meta's apps have been geared to benefit from interaction with photos. It will take time for Meta to optimize the platforms to the newer consumer habits, hurting revenue in the near term.

Those headwinds appear to be longer lasting than initially expected, hence the austerity measures mentioned above. 

The challenges are already priced into Meta Platforms' stock

META P/E ratio. Data by YCharts. P/E = price to earnings.

While Meta's challenges should not be underestimated, they are no reason to sell now. The stock is already down 58% off its highs, so the risks mentioned above are arguably already priced in. Meta is trading at a price-to-earnings ratio of 12 and a price-to-free-cash-flow of 11, near the lowest the stock has sold for in the last five years. 

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

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Parkev Tatevosian has positions in Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. 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.

Netflix (NASDAQ: NFLX) stock has been experiencing a miserable run over the past six months. The streaming pioneer thrived in the early stages of the pandemic when folks were staying at home more often and demand for entertainment was surging. Meanwhile, the COVID-19 restrictions meant that the entire industry paused content creation, saving billions in cash for Netflix. 

Those ideal conditions have quickly vanished while headwinds are gaining momentum. Netflix went from adding millions of subscribers every quarter to now reporting losses. The stock is down 75% off its highs as a consequence. However, Netflix could be at a tipping point where investors may want to take notice.

Investors fear subscriber losses will continue 

In its most recent quarter, which ended on March 31, Netflix noted that it lost 200,000 subscribers from the quarter before. That was its first such quarterly decline in over 10 years. But what made matters worse was that Netflix forecast another loss in the second quarter of 10 times that magnitude. If it comes to fruition, the expected 2 million subscriber loss in Q2 will now make it a trend of subscriber losses rather than a one-off event. That is understandably spooking investors uncertain about how long or deep it will be.

A meaningful part of the stock's decline is due to those fears. Therefore, if Netflix, in its next quarterly update, informs investors that it expects subscriber losses to subside and issues a forecast for millions of new customers in Q3, it could cause the stock to reverse higher. While the current quarter may not hold significant catalysts to boost subscriber growth, the next may be different. Inflation is biting into consumer budgets, forcing them to make the tough decisions on where to save money because they are paying more for necessities like food and gas. 

US Consumer Price Index YoY data by YCharts

At less than $20 per month, Netflix is arguably an affordable entertainment option for families worldwide. In contrast, a visit to the movie theater could cost five times as much for a family of four (including concessions). And a concert, theme park, or sporting event could be multiples higher than even that amount. Of course, there are cheaper streaming service options, but Netflix has announced its own lower-priced, ad-supported tier that could be available this year. 

Macroeconomic conditions have been a significant headwind for Netflix in 2022; those look like they are at their nadir. The turnaround might be a tipping point that could send Netflix's stock higher. 

Netflix's cheap valuation could propel it higher

NFLX PE Ratio data by YCharts

Netflix is trading at a price-to-earnings of 15.9, its lowest in the last five years. The cheap valuation suggests that once investors observe the turnaround in subscriber losses, the stock could jump in response. The longer-run trend is on Netflix's side with consumers canceling traditional cable subscriptions and streaming their content instead.

The short-term headwinds are bound to subside; it appears a question of "when not if." Rather than trying to time the bottom, investors may want to start adding a position in Netflix stock now.

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

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Parkev Tatevosian has positions in Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Netflix. The Motley Fool Australia has recommended Netflix. 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.

Amazon (NASDAQ: AMZN)'s stock split has come and passed, and the company is now trading on a split-adjusted basis. Given the newly lowered share price, it is an excellent time to consider the bear and bull case for investing in Amazon's stock. 

The bear case will center on its rapidly rising costs amid decelerating revenue growth. Meanwhile, the bull case will focus on higher-profit segments taking a more meaningful share of the revenue, making the stock arguably cheap. Let's dive deeper. 

Bear case: Slowing revenue and rising costs is a poor combination

Amazon came through in the clutch for hundreds of millions of households when the coronavirus pandemic forced non-essential businesses to close their doors to in-person shoppers. Sales surged for Amazon as it became a prominent alternative for folks looking to avoid shopping at bricks-and-mortar stores. Indeed, revenue jumped $106 billion higher in 2020 from 2019.

Fulfilling an increase of that magnitude is no easy task. It required Amazon to double the size of its fulfilment network in 24 months.

AMZN Total Operating Expenses (Quarterly) data by YCharts.

Those investments in capacity are now weighing on profits as revenue growth is decelerating from pandemic highs. In its most recent quarter ended on March 31, revenue increased by 7%, or less than $8 billion from the same quarter in the year prior -- its slowest rate of growth in several years. Meanwhile, total operating expenses rose by over $13 billion.

Unfortunately, management projects this trend to continue while it works to balance capacity with sales. Amazon forecasts revenue to grow by an even lower 5% in its second quarter. Worse yet, it expects operating income to fall to $1 billion, down from $7.7 billion in the same quarter last year. The estimates are midpoints.

There is no telling how far revenue growth will decelerate as economic reopening gains momentum, which will continue weighing on operating income in the near term. 

Bull case: More profitable segments are growing faster 

Amazon's revenue growth is slowing after the surge at the pandemic's onset. Internally, however, Amazon's more profitable segments are taking more importance. Its Amazon web services segment accelerated growth to 37% in its most recent quarter, up from 32% in the prior year. That segment boasted an operating profit margin of 35% in Q1. Amazon is a leading force in the cloud services industry, which is estimated to reach $495 billion in spending in 2022.

Moreover, Amazon has developed a burgeoning advertising business. Revenue in this segment grew by 25% in Q1 to reach $7.9 billion. Marketers spent $763 billion globally in 2021, and it is reasonable to expect Amazon can take a more meaningful share of this market. Hundreds of millions of shoppers visit Amazon's website, looking to spend money. Advertisers would love the opportunity to influence those decisions.

AMZN PE Ratio data by YCharts.

The rise of these more profitable revenue sources has improved Amazon's operating profit margin from 0.2% in 2014 to 5.3% in 2021. Finally, to make the case more compelling, Amazon's stock is as cheap as it's been in a long time. At a price-to-earnings ratio of 51, it's near the lowest in the previous five years.

Bulls win out 

Overall, the bull case is stronger than the bear. The temporary imbalance between capacity and sales will eventually balance. On the side of the bulls, the growth in Amazon's web services and ad businesses will likely last long term. Couple that with an inexpensive valuation, and it makes Amazon stock an excellent buy right now.

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

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Parkev Tatevosian has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon. The Motley Fool Australia has recommended Amazon. 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.

Netflix (NASDAQ: NFLX) has been getting a lot of attention lately, but unfortunately, for the wrong reason. The streaming pioneer reported its first quarter of subscriber losses in over a decade, pointing to rising competition, account sharing, and the reversal of the pandemic boom as reasons for the drop-off.

These headwinds have been meaningfully negative, causing the stock price to fall by 71% off its highs in 2021. Let's look more closely at why everyone is talking about Netflix stock.

1. Netflix faces rising competition

Netflix is not just competing with rival streaming services, though they are playing a part. Netflix is also competing with the rise of free, ad-supported entertainment options that consumers have at their fingertips: Alphabet's YouTube, TikTok, and Meta Platforms' Instagram have all gained in popularity. Unlike Netflix, those services are free to consume. The difference is that viewers are shown advertisements that interrupt their engagement, which is a feature they've demonstrated a willingness to tolerate.

For years, Netflix's management had been against releasing an ad-supported version of its service at a lower price. However, facing subscriber losses for the first time in over a decade and a stock price that has been down 71%, management signalled that it is planning an ad-supported version that could launch as early as the end of this year.

NFLX data by YCharts.

2. 100 million more homes should be paying for Netflix

That Netflix discovered shared accounts isn't surprising, but the scale of the sharing is a bit of a shocker. The figure has some investors talking about why management let it get to this level before doing something about it. Did they believe that allowing customers to use each other's accounts makes them willing to pay higher subscription prices? Or perhaps developing the technology to limit sharing is costly, and the company would rather spend money on creating content instead?

Regardless, Netflix essentially has 100 million customers using the service without paying. Interestingly, launching an ad-supported version will help solve this problem, although not entirely. Netflix can show advertisers that the service is used in the 222 million paying households and an additional 100 million nonpaying ones. In that way, Netflix could draw an increased budget from marketers who would be willing to pay more because they're getting the opportunity to influence 100 million more households.

Netflix grew to earn $29.7 billion in revenue in 2021 without any ad support. An additional income stream could boost that closer to $40 billion in a few short years.

NFLX Revenue (Annual) data by YCharts,

3. Folks are streaming less content now

During the first pandemic-plagued year of 2020, Netflix added 36.6 million streaming subscribers -- 8.7 million more than the 27.9 million it added in 2019. That acceleration of growth was impressive from a company the size of Netflix, which already had the industry lead. However, momentum slowed in 2021, when Netflix added only 17.2 million subs.

It's only getting worse as Netflix lost 200,000 subscribers in Q1 and forecasts it will lose 2 million more in the second quarter. This downward trajectory is troubling news for shareholders, who are uncertain how far this will go. Will the service eventually lose all the 36.6 million subs it added during 2020? That seems unrealistic. Will it lose the incremental 8.7 million subscribers it added in 2020 vs. 2019? That's more likely. Will it turn things around in the third quarter and return to growth? That seems most likely.

The changes going on at Netflix are definitely noteworthy. It's clear why investors are buzzing about its stock.

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

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Parkev Tatevosian has positions in Alphabet (C shares), Meta Platforms, Inc., and Netflix. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Netflix. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Netflix. 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.

Apple (NASDAQ: AAPL) is one of the world's best-known companies. But one of the characteristics it is least known for is its dividend payment. The company is relatively new to the dividend-paying list of stocks and is far from reaching Dividend King status. The tech giant resumed paying a dividend in 2012 after a 17-year pause.

Still, Apple could be an excellent dividend stock for investors who buy it today. Let's look at its capacity to pay dividends and consider its valuation to determine its virtues as a dividend stock. 

Apple has delivered robust dividend growth 

Income investors can be encouraged by Apple's acceleration of dividend payments. From 2012 to 2021, the company has increased its dividend per share from $0.10 to $0.85. That means shareholders saw their dividends grow more than eightfold in that time.

In that same period, earnings per share rose from $1.58 to $5.61. Earnings are crucial to sustaining a dividend payment. In that regard, Apple's quality earnings growth is a good sign for the prospects of dividend increases. 

Its earnings are buoyed by continued innovation in its products, like the iPhone, Apple Watch, AirPods, and iPads. Supplementing that is a robust and expanding services segment that totaled 20% of revenue in its most recent quarter, which ended March 26. The rise of the services segment is crucial because it generated a gross profit margin of 72.6% vs. a gross profit margin of 36.4% for its products.

AAPL payout ratio data by YCharts.

While Apple's current dividend yield is a modest 0.65%, there's plenty of room for it to grow when you consider the company's dividend payout ratio. This is the percentage of earnings paid out in dividends. Most recently, Apple's dividend payout ratio was 14.5%, so the company could sustainably increase its dividend payment even if earnings remained constant, or sustain its current dividend even if profits decrease. The lower the percentage, the more wiggle room a company has in its dividend payment. 

Apple's stock is not expensive 

Comparing Apple's price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) ratios to their historic levels reveals that it is valued slightly above the average for those ratios over the past five years. In other words, in the last five years, there were times when Apple was pricier and times when it was cheaper. 

AAPL P/E ratio data by YCharts.

Another way to measure valuation is a comparison with a competitor. Using the same metrics, Apple sells at a discount vs. one of its rivals, Microsoft (NASDAQ: MSFT). Of course, it is not an apples-to-apples comparison (pardon the pun), but Microsoft is a big tech stock with a mix of hardware and software revenue. 

Accordingly, income investors who buy Apple stock today will probably thank themselves 10 years from now. To more directly answer the question in the headline, yes, Apple is an excellent dividend stock to buy.  

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

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Parkev Tatevosian has positions in Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. 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.

Amazon (NASDAQ: AMZN) has had a volatile few years since the pandemic's onset. It did an excellent job fulfilling the surge in demand for customer orders when folks were avoiding shopping in person. As economies reopen, sales growth is slowing down but remaining at high levels. Between all of that, founder Jeff Bezos stepped down from his role as chief executive officer of his founded company. 

And now, Amazon's stock has fallen along with the broader market, creating a favorable opportunity to buy. Let's look at three reasons investors should buy Amazon stock and one reason to be cautious. 

1. Its cloud computing business is thriving

Amazon's web services segment (AWS), which provides cloud computing services to enterprises worldwide, grows faster than the business overall. In its most recent quarter, which ended March 31, AWS reported revenue of $18.4 billion. That was up by 37% from the same quarter in the prior year. Increasingly, businesses are choosing Amazon for their computing infrastructure needs. With Amazon's cloud services, companies can turn what used to be a considerable up-front capital expense into a monthly expenditure.

Fortunately for Amazon, AWS also delivers healthy profit margins. Indeed, in the same quarter mentioned above, AWS earned $6.5 billion in operating income on revenue of $18.4 billion. To put that into perspective, Amazon has not reported an operating profit margin of over 6% overall in the last decade. Without the AWS segment, Amazon would be losing money.

AMZN Operating Margin (Annual) data by YCharts.

Amazon has the leading market share in the cloud industry, which is expected to grow nicely from the estimated $400 billion in annual sales it achieved in 2021.  

2. It's developing a robust advertising business 

Another powerful reason to own Amazon stock is that it's built a robust advertising business. Amazon has increased ad sales by more than 25% in its past six quarters. In Q1, ad sales totaled $7.9 billion. Like the AWS segment, advertising is a lucrative business. Besides the initial costs to set up the capability, there is little expense associated with incremental ad sales.

Amazon boasts over 200 million Prime members. These folks have a payment method on file and access to fast and free delivery provided by Amazon. They are also one click away from purchasing a product. There is arguably no other advertising real estate that is so close in proximity to consumer purchase. It's not surprising that marketers would want the opportunity to influence individuals browsing Amazon's app and website. 

3. The stock is cheaper than it has been in years 

AMZN PE Ratio data by YCharts.

Making the case to buy Amazon more compelling, the stock is cheaper than in years. Amazon's price-to-sales ratio of 2.3 and price-to-earnings multiple of 52 is near their lows of the past five years. The company has been caught up in the broad market sell-off, and its stock is down considerably off its highs. 

Reason to hesitate: e-commerce sales growth is slowing 

The one reason to hesitate about Amazon is the near-term headwinds facing its online sales. Consumers boosted spending online at the pandemic's onset to avoid shopping in person. Now that billions of folks have gotten vaccinated against COVID-19 and brick and mortar stores are reopening, people feel better about leaving their homes. That's creating a headwind for Amazon, which saw online sales fall by 3% year over year in its quarter ended in March. 

To be sure, it's a significant slowdown from the 40% growth the business experienced in Q4 2020 and Q1 2021. The trend of falling sales could continue if the threat of COVID-19 continues to fade in consumers' minds. Yet ultimately, investors should not allow these risks to stop them from buying an otherwise excellent company at a bargain price. 

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

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Parkev Tatevosian has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon. The Motley Fool Australia has recommended Amazon. 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.

Some investors who missed out on buying Apple (NASDAQ: AAPL) stock in 2010 may be kicking themselves. For the lucky bunch who invested $1,000 in Apple stock twelve years ago, their investment would be worth $18,400 today. That's an impressive return on investment over any time frame.

But can Apple replicate its past success in the future? Let's look more closely at the probable causes for Apple's previous performance and consider if investors who buy Apple stock today can expect similarly impressive returns. 

The iPhone is vital to Apple's success 

Apple's dominant performance over the last decade could not have been achieved without the overwhelming success of the iPhone. One estimate from 2019 suggests that Apple sold at least 1.4 billion iPhones over the previous 10 years. In its most recent two quarters, iPhone net sales totaled a staggering $122 billion, up from $114 billion at the same time last year.

The iPhone is the center of Apple's ecosystem that keeps customers returning for newer versions of similar products. Indeed, in the two quarters mentioned above, iPhone sales totaled 55% of Apple's $221 billion overall sales.

AAPL Revenue (Quarterly) data by YCharts

The popularity of the Apple Watch, AirPods, Apple Music, and more would not be possible without the massive base of consumers who own an iPhone. Nevertheless, Apple has created several products that have endured numerous iterations. That demonstrated ability to develop innovative products fueled Apple's stock price performance.

Investors are confident that Apple will sell billions worth of its existing products and that it is likely to create new products that can reach similar if not more tremendous success. Otherwise, Apple's market capitalization would not be north of $2 trillion. 

Even with its impressive market share, the sale of products tends to be cyclical and riskier than the sale of software services. With services, consumers pay for services through recurring subscription fees, which reduces the company's risk and provides a steady stream of revenue. Over the years, Apple has built out its services segment to become a meaningful part of its business.

As of its second quarter ending March 26, Apple boasted 825 million subscribers to Apple Music, iCloud, and Apple TV+, up by more than 165 million in the last year. The segment totaled 20% of Apple's overall sales in the quarter that ended in March.

Another benefit of a booming services segment is that these units often produce higher margins. Apple's services segment boasts a 72.6% gross margin, which is significantly higher than the product segment's gross profit margin of 36.4%. As seen in the chart below, the higher gross margin of the services business has lifted Apple's overall gross margin.

Investors have likened the growth of the services segment because of its lucrative 72.6% gross margin and its recurring nature. That's significantly higher than its product segment gross profit margin of 36.4%. The higher gross margin of the services business has lifted Apple's overall gross margin.

AAPL Gross Profit Margin (Quarterly) data by YCharts

Can Apple replicate its success from the previous decade? 

While Apple's stock price may not replicate the magnitude of success, it is likely to maintain its position as one of the most dominant tech companies worldwide. Folks are spending an increasing amount of time on their electronic devices, and Apple has earned the trust of billions of people already. That could mean that if or when Apple launches a new product, it will garner a more significant part of the population who will at least try it out.

For instance, reports suggest that Apple has secretly worked on a self-driving electric car. If that product gets widespread customer adoption among existing Apple fans, it could deliver massive shareholder gains. Of course, it's nearly impossible to predict what Apple's precise returns will be over the next decade, but the company sure looks to be a safe bet for making today's investors wealthier over time. In recent weeks, Apple's stock has been caught up in the broader market sell-off, but that allows long-term investors to scoop up shares at a lower price. 

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

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Parkev Tatevosian has positions in Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. 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.

Investing in dividend stocks can be an excellent way to build wealth over time. It can also provide a recurring income during retirement. Indeed, there are several benefits to investing in dividend stocks, but one downside is excluding top stocks that have not yet started to pay a dividend.

Typically, when businesses have more growth opportunities than they have cash, they reinvest any money the business generates into growth areas. Eventually, cash from operations exceeds growth opportunities and the funds needed to sustain the business for successful companies. At that time, a company looks to return capital to shareholders. 

Netflix (NASDAQ: NFLX) is still in the growth phase. It is spending nearly all the cash the business generates on growth opportunities, mainly in creating content. Let's consider if Netflix can eventually become an excellent dividend stock. 

Netflix has the right characteristics 

As of March 31, Netflix boasts 222 million streaming subscribers. That was up by 6.7% from the same time last year. Management thinks the company has a long runway for growth and can potentially reach 500 million streaming subs in the long term. The 500 million total could give investors an idea of when the company may start paying a dividend. Until it approaches that sum, it will likely invest in ways to attract more subscribers.

Recently, its most important use of cash has been to create or purchase content for the platform. That makes sense. As a streaming service, it attracts users with its content. Netflix has spent close to $9 billion in cash on content in its most recent two quarters combined. To put that figure into context, Netflix earned roughly $16 billion in revenue during that time. This massive investment primarily in content leads Netflix to approximately break even on cash flow.

NFLX Free Cash Flow data by YCharts

Eventually, if Netflix reaches the 500 million subs it's targeting, it can bring in so much revenue that the content budget will make up a smaller percentage. Additionally, Netflix has spent an increasing share of its content budget on Netflix creations instead of licensing deals in recent years. The implication of this is that it builds up Netflix's content library permanently rather than temporarily. A massive content library could retain and attract subscribers without Netflix necessarily investing aggressively in new content. 

There is undoubtedly a visible path to when Netflix could generate sufficient free cash flow to pay a dividend. Once it does start paying a dividend, it could also increase it at a steady and predictable rate. Netflix's subscriber-generated revenue is non-cyclical and recurring. It will not be much of a mystery how much revenue and free cash flow Netflix will generate in the years that follow it reaching an equilibrium subscriber total. 

Should dividend investors buy Netflix stock in anticipation? 

The answer to that question depends on when you want those dividends. If you need the investment to start paying dividends in the next five years, no, Netflix may not be a suitable investment. The company may still be investing most of its cash in content. However, if your time horizon is 10 years or longer, then Netflix could be an excellent dividend stock by then.

NFLX PE Ratio data by YCharts

To make the case more compelling, Netflix stock has scarcely been cheaper when measured by the price-to-earnings (P/E) ratio than it is right now. 

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

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Parkev Tatevosian has positions in Netflix.The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Netflix. The Motley Fool Australia has recommended Netflix. 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.

Netflix (NASDAQ: NFLX) reported first-quarter results on Tuesday. The company shed subscribers for the first time in years. The streaming pioneer was a massive winner during the initial stages of the pandemic when billions of people were spending nearly all their time at home. 

Now that demand for in-home entertainment is normalizing with economies reopening, Netflix looks to existing viewers to boost subscriber growth. Management estimates nearly 100 million people watch Netflix on shared accounts, and they should be paying for the service instead. 

Netflix has more customers than its subscriber totals indicate

As of March 31, Netflix boasted 221.6 million paying subscribers. That was down by 200,000 from the previous quarter, but still higher by 14 million from the same quarter a year ago. Interestingly, Netflix claims there are approximately 100 million people who are gaining access to Netflix through account-sharing. The company believes there is a massive opportunity to boost revenue growth by monetizing those users.

Co-Founder and CEO Reed Hastings touched on the matter in the company's conference call following the first-quarter earnings release:

So on the 2 parts, we're working on how to monetize sharing. We've been thinking about that for a couple of years. But when we were growing fast, it wasn't the high priority to work on. And now, we're working super hard on it. And remember, these are over 100 million households that already are choosing to view Netflix. They love the service. We just got to get paid at some degree for them.

There are several tools at Netflix's disposal to address account sharing. It's a matter of how strictly the company wants to control unwanted sharing. For instance, it could implement a policy that requires users to register accounts on a restricted number of devices. That would work to limit sharing because the household paying for the service will be less likely to share the log-in information if it restricts their own usage. 

Another method the company is currently testing in select countries is to get households to pay a small premium for sharing their account with family members living outside of the home. That policy may not increase subscriber growth, but it will boost average revenue per subscriber as existing members pay more for the privilege of sharing Netflix access with others. Nevertheless, it works toward Netflix's goal of monetizing users already watching its content. 

NFLX Revenue (Quarterly) data by YCharts

Netflix reported revenue of $7.9 billion in the quarter, which ended on March 31. That was 9.6% higher than the same quarter last year, and for the first time in a long while, it grew revenue by less than a double-digit percentage. Revenue fuels the flywheel for Netflix. It can spend the money that comes in on content, which could attract and retain existing customers, which boost revenue further, and so on. For that reason, monetizing shared accounts has become a top priority for management in the near term.

The opportunity is genuinely massive

If Netflix can generate a modest extra monthly payment of $3 per user from the estimated 100 million non-paying viewers, that would generate $3.6 billion per year in annualized revenue. To put that figure into context, Netflix earned $29.7 billion in revenue in the fiscal year 2021. Keep in mind that Netflix's current average revenue per user is above $8 in all of its geographic regions, so a $3 per user increase is a conservative target.

NFLX data by YCharts

It's unclear whether achieving this goal will work to assuage investors who are concerned with Netflix's slowing subscriber growth amid rising competition. Regardless of investor response, the company can use the additional funds to boost its content slate and increase its competitive advantage. It's undoubtedly something long-term investors interested in Netflix should pay close attention to over the next several quarters. 

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

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Parkev Tatevosian owns Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

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

Amazon (NASDAQ: AMZN) is getting a lot of attention after announcing a 20-for-1 stock split on March 9. Shareholders must approve the move on a vote on May 25 before it can go into effect.

Regardless, the change will not impact ownership percentages for shareholders. But there are more prominent reasons to be excited about Amazon stock. Keep reading to find out what those are.

1. Amazon web services is accelerating

Amazon reports operating-income results from three distinct segments: North America, international, and Amazon Web Services (AWS). In the year ended Dec. 31, Amazon reported $24.9 billion in operating income. Of that total, $18.5 billion came from AWS.

Similarly, in 2020, Amazon earned $22.9 billion in operating income, and $13.5 billion was derived from AWS. The coronavirus pandemic accelerated the adoption of cloud computing, and as a result, AWS is thriving.

AMZN Operating Income (TTM) data by YCharts.

Fortunately for shareholders, the trend is unlikely to reverse because for businesses, the move to cloud computing replaces a considerable, upfront fixed cost with a smaller recurring cost, based on usage. In its fourth-quarter ended Dec. 31, AWS generated $17.8 billion in revenue. That was up by 40%, compared to the same quarter of the prior year. What's more, AWS has grown revenue at an accelerating rate for four consecutive quarters.

Businesses typically sign long-term contracts with Amazon for cloud services. As of Dec. 31, 2021, the average length of these long-term contracts was 3.8 years.

It's not like there was a boom during the pandemic that will quickly snap back in the aftermath. The value of these contracts is increasing, too. As of Dec. 31, the total value of long-term contracts for cloud services was $80 billion. That figure is up sharply from the $50 billion total at the end of 2020.

2. Amazon is becoming a dominant force in advertising

The second reason to get excited about Amazon stock is its growing revenue from advertising. In the fourth quarter, Amazon generated $9.7 billion in ad revenue. That was up by 33% from Q4 in 2020.

The company is home to more than 200 million Prime members who have access to fast and free shipping on millions of items. Plus, millions more shoppers get fast and free shipping on orders over $25. Both groups of shoppers have payment information on file and are one click away from purchasing. It's no surprise that marketers would be wildly interested in gaining the attention of this powerful buyer network.

In 2021, advertisers spent $763 billion globally, which increased 22.5% from 2020. In recent years, marketers have been allocating more dollars to digital channels because of the ease of measurement and higher return on investment. Digital's share of overall ad spending totaled 64.4% in 2021, up from 52.1% in 2019. According to GroupM, 85% of digital advertising outside China will go to Facebook, Alphabet's Google, and Amazon.

FB Operating Margin (TTM) data by YCharts.

Like cloud services, advertising revenue is lucrative and drives higher profit margins than Amazon's retail-sales segment. If you need proof of that, consider Alphabet's and Meta Platforms' operating profit margins over the past several years.

The proliferation of Amazon's web services and advertising revenue -- two areas with high profit margins -- is undoubtedly more to get excited about than the upcoming stock split. 

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

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Parkev Tatevosian owns Alphabet (C shares), Amazon, and Meta Platforms, Inc. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Alphabet (A shares), Amazon, and Meta Platforms, Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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

Netflix (NASDAQ: NFLX) is having a rough first few months in 2022. Due to multiple factors, including rising competition and headwinds from the economy's reopening, the stock is down over 40%.

The company will be reporting first-quarter earnings on April 19, and that event could create a buying opportunity for long-term investors in the coming weeks. Let's look at why that might be the case. 

Netflix is way ahead of the competition 

Usually, Netflix adds roughly 8.4 million subscribers in the first quarter, including cancellations. At least, that's been the average in the first quarter, going back to 2017. Management has set the bar much lower this year. Netflix guided investors to look for additions of just 2.5 million in Q1 of this year, which is 5.9 million below its historical average. The lowered expectations make it more likely that Netflix will surpass those estimates. However, if it reports less than the 2.5 million figure, that could trigger further selling of Netflix stock.

That scenario would be a buying opportunity for long-term investors, barring any commentary from management that suggests there are serious problems. Don't get me wrong -- slowing subscriber growth is not something to ignore. That said, the stock has arguably already paid the price, falling 42% so far in 2022. Furthermore, the coronavirus pandemic may have boosted subscriber growth during the initial lockdown phases, but that likely brought forward customers who may not have signed up until 2022 or 2023. Understandably, growth would slow after a massive surge. 

That brings me to the fear of rising competition. Netflix has had more than a decade's head start on most of these new entrants. It already boasts 222 million paying subscribers, while The Walt Disney Company is the only other one that claims over 100 million. Moreover, Netflix's 222 million subscribers generated nearly $30 billion in revenue in 2021, and it's already on pace for more in 2022. The massive scale gives Netflix a difficult-to-match content budget. In 2021, it spent $17.7 billion on content, $6 billion more than in 2020.

NFLX Operating Margin (TTM) data by YCharts

Perhaps more importantly, even though Netflix is boosting spending on content, it is doing so responsibly. The restraint could be demonstrated by observing the rise in Netflix's operating profit margin in the last five years. The company is balancing a rising content budget with an intent to increase profitability. Indeed, management's long-term outlook has stated a goal of steadily increasing the operating profit margin each year.

The sell-off has Netflix trading at bargain prices 

Netflix is trading at price-to-sales and price-to-earnings ratios of 5.3 and 31, respectively. Those are near the lowest valuations it has sold for in the last five years. As I mentioned earlier, the company is paying the price for slowing growth and concerns over competition. 

NFLX PS Ratio data by YCharts

However, Netflix has a powerful secular tailwind at its back from consumers canceling traditional cable subscriptions and moving to streaming services. Additionally, a rise in the quantity and quality of mobile devices means people have more opportunities to stream content.

There will undoubtedly be volatility in the near term, especially surrounding the company's earnings report on April 19. Still, in the long run, Netflix could steadily increase subscribers and profits for several years -- and it could be an excellent stock to buy in the coming weeks. 

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

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Parkev Tatevosian owns Netflix and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Netflix and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool Australia has recommended Netflix and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

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

Apple (NASDAQ: AAPL) has been one of the best-performing companies in the last two decades. The excellent performance has translated into its market capitalization nearing an astounding $3 trillion. 

Savvy investors who follow Apple probably know these three things about the business: The iPhone continues to drive top-line growth. Apple has a robust and growing services segment. And finally, Apple has a history of successful innovation. Let's look at each in greater detailer below. 

1. The iPhone is still driving revenue 

The iPhone is arguably the most successful product of all time. Launched over a decade ago, new iterations are driving hundreds of billions in sales for Apple. In its most recent quarter ending Dec. 25, Apple's iPhone sales totaled $72 billion, up from $66 billion during the same quarter the year before. To put that figure into context, Apple's overall sales were $124 billion in the quarter. Apple's most recent launch, the iPhone 13, came with the latest 5G technology expected to drive consumers to upgrade older versions over the next couple of years.

The iPhone propels the company's flywheel and is an attractive entry point for consumers into Apple's ecosystem. Once a user adopts an iPhone as their phone of choice, they are less likely to switch to a new brand due to Apple's strong customer retention.

That has undoubtedly helped Apple grow revenue from $229 billion in 2017 to $366 billion in 2021. Shareholders would be thrilled if Apple could match or beat that growth over the next four years. The top-line growth flowed to operating income increases from $61 billion to $109 billion in that same time. Increasing sales by over $130 billion in four years is a difficult feat, but boosting operating income by $48 billion raises the bar further.

2. The rise of the services segment 

Over the last two decades, Apple has built a robust and growing services segment. The business features exciting products like Apple Music, Apple TV+, Apple Arcade, iCloud, etc. Consumers have liked the offering that compliments an iPhone and improves the ownership experience. For instance, an iPhone user with an Apple Music subscription can create a custom music playlist and start playback through a voice command without touching the phone.

Apple was the first streaming content service to capture the best picture award at the Oscars for Coda. The acclaim could attract a new swatch of subscribers to Apple TV+, a boon to an already robust services business.  

The segments' revenue increased to $20 billion in the fourth quarter, up from $16 billion in the same quarter the year before. What's more, the services segment has significantly higher profit margins than products. Indeed, in Q4, the gross profit margin in the services segment was 72.4%, meaningfully higher than the 38.4% of product sales. For that reason, investors are encouraged by the growth of the more profitable segment over the years. 

3. History of innovation 

Apple is, by no stretch of the imagination, a one-hit-wonder. The company has a lengthy history of successful innovation. The iPhone is among a wide portfolio of leading-edge technology Apple has developed. Those hits include the iPad, iMac, iPod, Apple Watch, and AirPods. Apple's innovation is not limited to products, and it counts several famous services to its name, including the App Store, iTunes, Siri, Apple Music, Apple TV+, IOS, and more. 

The success shows how Apple can keep creating wildly popular products and services to drive sales and profits, delivering consistent shareholder returns in the long run. 

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

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• Are these the best ASX ETFs to buy with $1,000 in May?
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Parkev Tatevosian owns Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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

There are rarely any investments without risk. Typically, even in your most admired stocks, you have one or more cautionary signals. Netflix Inc (NASDAQ: NFLX) is no different.

The last few years have been volatile for the company and its stock price. It thrived at the pandemic onset when demand for at-home entertainment surged. The reversal of that trend has become a headwind. 

There are several reasons investors should buy Netflix stock right now, and at least one reason you should sell. Let's look at each in more depth below. 

1. Netflix is the leader

Netflix is the undisputed streaming industry leader. The company pioneered this form of delivering content more than a decade ago. Before then, consumers were relegated to subscribing to expensive cable TV. In addition to higher costs, cable TV offers lower value. You can only use a cable service at home or the office. When Netflix came along with a streaming service, folks could watch content on their phones, tablets, and laptops anywhere they get internet access. 

It's no surprise that Netflix has soared to reach 222 million subscribers as of December 31. The trend is unlikely to reverse, and over the next several years, Netflix believes it can reach over 500 million subscribers.

Underlying that growth is the superior customer-value proposition -- content all month for less than $20. The icing on the cake: The more people who join, the better the service becomes for everyone. The more revenue comes in, the more Netflix can allocate to its content budget. It spent $17.7 billion on content in 2021, up from $11.7 billion in the year before.

2. A profitable business model 

Streaming content lends itself to excellent efficiencies in scale. For instance, it does not cost Netflix that much more to show its content to an incremental 50 million viewers. Again, that's in stark contrast to cable TV, where each new customer needs a professional installation and expensive equipment.

The advantage is demonstrated in Netflix's growth in operating income from 2012 to 2021, when it expanded from $50 million to $6.2 billion. That's exponential growth, and it could continue as Netflix works its way toward its target of 500 million subscribers.

3. The stock is selling at its lowest price in years 

Netflix is trading at a price-to-earnings ratio of 33. According to that metric, that's the lowest it has been in nearly a decade. If you prefer the price-to-sales ratio at 5.7, that's near the lows of the last five years. Netflix stock is down 46% off its highs of late 2021. The market is concerned that subscriber growth will slow in the near term, which leads nicely into the one reason to sell Netflix stock.

A reason to sell Netflix 

Subscriber growth could be slowing or potentially even reversing for Netflix. The company experienced a surge of new signups during the pandemic, and they may begin canceling as more entertainment options become available.

During the pandemic for Netflix, one of the negatives was a slew of new entries into the streaming industry. Whereas Netflix has had mostly an open runway for the last decade, it is now facing serious competition from studios with deep resources. 

To make matters worse, the new entrants are willing to absorb operating losses in their streaming services to attract subscribers. Nearly all new entrants have priced their services below Netflix. Already, management has acknowledged the slowing growth, estimating new subscriber additions of just 2.5 million for the first quarter of 2022, 5.9 million below the average gain in the first quarter in the last five years.

The final verdict 

Overall, the reasons to buy outweigh the headwind from slowing growth. Netflix's stock has been cut almost in half, arguably more than pricing in slowing growth. Meanwhile, it's still the undisputed leader with over 200 million subscribers and is expanding profits exponentially. 

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

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

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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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

Roblox (NYSE: RBLX) experienced a surge of new customers and engagement at the pandemic's onset. The metaverse pioneer caters to the younger generation, many of whom were suddenly forced to spend most of their time at home. 

Thankfully, several effective vaccines against COVID-19 have been developed, and governments are increasingly removing pandemic-related restrictions. While it's good for humanity, the ongoing economic reopening has been bad news for Roblox. Let's look at the worsening trends for the metaverse stock. 

Headwinds are persisting for Roblox 

In its most recent update on March 15, Roblox said that bookings in February decreased by about 3% from the same month last year. Bookings are customer deposits to purchase an in-game currency called Robux, which eventually becomes revenue when players spend it on gameplay. Therefore, a decrease in bookings indicates a headwind to revenue. Average bookings per daily active user, which considers user totals, decreased by about 25% in February from the same month of the prior year.

The metric started falling in the second quarter of 2021 when economic reopening gained momentum and schools started bringing students back to classrooms. Management thinks the headwinds will continue through the middle of the year and then begin improving around June.

Beyond player deposits, engagement -- that is, the amount of time spent on the site -- is also falling. In its most profitable U.S. and Canada markets, engagement fell from about 3.2 billion hours in the first quarter of 2021 to 2.5 billion in the fourth quarter of 2021. Similarly, daily active users from the region fell from 12.6 million to 11.2 million in that same period. Management might be predicting a turnaround in the middle of the year, but there is no certainty that will be the case.

The future remains as yet unclear. On the one hand, economies might be reopening, and people are leaving their homes more often. At the same time, the pandemic is far from over. Hundreds of thousands of people are testing positive for COVID-19 daily, and tragically large numbers are becoming hospitalized and worse. All that means the world can do more in the battle against COVID-19.

As progress against the virus does occur and people and families return to pre-pandemic habits, this will be a challenge for Roblox. So on the surface, it looks as though management's estimate of engagement turning around mid-year might be on the optimistic side. 

A lower price leaves a margin of safety 

Roblox's stock is paying the price for the headwinds. It's down 65% from the high reached late in 2021 and 55% year to date in 2022. Judging by the crashing price, the market expects troubling trends to persist a while longer.

Trying to time precisely when things will turn around can be a daunting task and one that few people can do. Instead, investors can look to Roblox's price-to-sales ratio and price-to-free-cash-flow ratio of 12.2 and 42, respectively. According to those metrics, Roblox stock has hardly ever been cheaper. Of course, that doesn't mean that it cannot go lower, but the discount gives investors a margin of safety if the headwinds persist longer than expected. 

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

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

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Parkev Tatevosian owns Roblox Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Roblox Corporation. 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 Bruce Jackson.

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

Amazon (NASDAQ: AMZN) announced a 20-for-1 stock split after the market closed on March 9. Typically, a split announcement draws a lot of attention to a stock and Amazon is no exception. 

Despite recent loss-taking by the broad market, Amazon's shares were up more than 6% on the day following the announcement. That said, a pending split should not be the sole reason investors buy or sell a stock.

Let's look at some of the details of the announcement and, more importantly, at Amazon's business prospects to determine if investors should buy its stock before the split.

Amazon announces 20-for-1 stock split 

While Amazon announced the 20-for-1 stock split on March 9, the move will not take effect immediately. Management still needs to gain shareholder approval on a vote slated for May 25. If approved, Amazon will trade on a split-adjusted basis on June 6.  

Note, however, that the change will not increase or decrease shareholder ownership. You will not suddenly own 20 times more of Amazon's business than before the split. Instead, your current ownership will be sliced more thinly. In the end, shareholders are left with the same magnitude of ownership, split into more pieces. 

Amazon's business prospects 

Digging into Amazon's business prospects, investors may find it more exciting than the news of the split. The company has increased revenue from $61 billion in 2012 to $479 billion in 2021. The explosive revenue growth has flowed to operating income, which increased from $676 million to $24.9 billion in that same time.

Amazon has evolved through the years, starting from a tiny bookseller to an e-commerce giant and now much more. Indeed, its more profitable Amazon Web Services segment has grown to an annual revenue run rate of $71 billion as of its quarter ended December 2021. What's more, Amazon generated over $30 billion in advertising revenue in the trailing 12 months.

It has all crescendoed in excellent shareholder returns and earnings-per-share (EPS) growth. In the last decade, Amazon has compounded earnings per share at a rate of 47.1%. Similarly impressive, its share price has increased by more than 1,500% over that period.

Amazon's stock price valuation 

Fortunately for potential investors, Amazon has been selling at its lowest price-to-earnings (P/E) ratio in the past five years. The market is concerned about how the economic reopening will affect sales and customer retention at Amazon in the near term. As a result, Amazon is trading at a P/E of 45, down from its peak of over 240 reached in 2018.

Before or after a stock split, Amazon is an excellent stock to buy for long-term investors. Better yet, to minimize the impact from trading activity surrounding the stock split, investors can split their purchase in two, buying half of their allocation before and half after the June 6 inflection point. 

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

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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.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Parkev Tatevosian owns Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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

There are several ways to consider if a stock is expensive. However, you may be surprised to find that they do not include the selling price. That's because even though Amazon's (NASDAQ: AMZN) stock is selling for over $3,000, what truly matters is where it trades relative to the company's results, such as earnings or revenue.

What's more, from a practical standpoint, most brokerages will allow you to buy fractional shares of a company. For instance, if you only had $300 to invest in Amazon, you can buy 0.10 shares (at a $3,000 stock price). That said, let's look at Amazon's business and then determine if the stock is expensive using financial ratios. 

The pandemic boosted an already successful business 

Over the past decade, Amazon has grown to a massive size. Sales in its fiscal 2020 year surpassed $386 billion. That was 37.6% higher than the previous year. The coronavirus pandemic caused hundreds of millions of people to avoid shopping in person for fear of contracting the potentially deadly virus.

Amazon was one of the prime beneficiaries of that change in consumer behavior. The company did an excellent job in delivering items that folks needed during the pandemic with only a few hiccups. That will certainly help keep those newly acquired customers with Amazon even in the aftermath of the pandemic. 

The surge in customer spending also had a more immediate impact. In the 12 months ended Sept. 30, Amazon generated $55 billion in cash from operations and another $55 billion during the same period last year. That massive inflow of capital has allowed Amazon to invest in the business's infrastructure. Indeed, during that same two-year period, the company has spent over $87 billion on property and equipment, such as data centers, warehouses, and delivery vans.

These investments could make Amazon an even more customer-friendly shopping destination --  allowing it to reduce shipping times, add more items to its "Prime Delivery" option, and lower prices for customers. 

For Amazon, attracting new shoppers and increasing the frequency at which existing shoppers buy can fuel further increases in another lucrative business segment: advertising. In its most recent quarter, the segment that houses Amazon's advertising revenue reported a rise of 49% to $8.1 billion. And for the most recent four quarters, Amazon earned nearly $31 billion in advertising revenue. 

Amazon's price multiples reveal it's not expensive

Amazon's business is heading in the right direction, but are its excellent prospects already priced into the stock, making it expensive for investors? 

 

Data by Ycharts.

According to Amazon's price-to-earnings and price-to-sales ratios, it is not expensive; in fact, it is relatively inexpensive. However, when looking at Amazon's price-to-free cash flow ratio, the stock does look expensive (see chart above). Considering that Amazon nearly doubled its investment in property and equipment from $30.6 billion to $56.9 billion, the cash flow figure may be less informative.

So, overall: No, Amazon stock is not expensive. 

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

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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.

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Parkev Tatevosian owns Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and recommends Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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

The metaverse is gaining popularity among consumers and investors after the company formerly known as Facebook announced it was making a significant investment in resources to become a metaverse leader. Now known as Meta Platforms (NASDAQ: FB), the company that started all the commotion is one of my favorite metaverse stocks to buy in 2022.  

My other favorite is one of the pioneers of the metaverse, Roblox (NYSE: RBLX). The company is a favorite with kids 16 and younger although it's increasingly being adopted by an older demographic as well. What follows is a more detailed look into what makes these two my metaverse stock picks for 2022. 

Meta Platforms 

Already the titan of the social-media world, Meta Platforms has made a bold move into the metaverse industry. The company announced it will have spent at least $10 billion on the expansion in fiscal 2021 and is likely to spend more in the years to follow. The move could be in response to decelerating revenue growth in the company's core social-media business.

CEO Mark Zuckerberg has said the metaverse is something he's long been interested in, and the timing could be perfect right now. Zuckerberg also said that he aims to help over 1 billion people be active on the metaverse before the decade is over.  While this is a bold ambition, it's not an unreasonable one from someone leading a company with over 3.5 billion monthly active users across its family of apps, including Facebook, Instagram, and WhatsApp.

What's more, Meta Platforms has the resources to invest in growing its new line of business. Between 2016 and 2020, the company has generated over $100 billion in operating income. And as of Sept. 30, Meta Platforms had over $58 billion in cash and equivalents on its balance sheet.

Roblox

While Meta Platforms is just now building its metaverse, Roblox has had a several-year head start. Roblox's metaverse platform has been primarily focused on kids and teenagers -- 48.9% of its daily active users are 13 years old or younger. It is growing users at a healthy rate, from 18.4 million in the third quarter of 2019 to 47.3 million in its most recent quarter ended Sept. 30.

Roblox is free to join and generates revenue by selling an in-game currency called Robux. The company is perhaps demonstrating the lucrative, cash-generating ability of the metaverse. It earned $181 million in cash flow from operations on revenue of $509 million in the third quarter. That's even before Roblox has developed a mechanism for generating income from players that never deposit money on the platform.

Nevertheless, Roblox increased revenue by over 100% in the third quarter. If the company can find a way to earn revenue from non-paying players -- for instance, showing them advertisements -- this could be a catalyst for boosting revenue growth even higher.

The metaverse industry is in its infancy and could spend decades expanding. Investing in metaverse stocks could be risky, but the potential reward could be worth the risk. For those of who want to dive into it in 2022, Meta Platforms and Roblox are my two favorite stocks to buy. 

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

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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.

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Parkev Tatevosian has no position in any of the stocks mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Meta Platforms, Inc. and Roblox Corporation. The Motley Fool Australia has recommended Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.