roulette wheelAfter Amazon’s much-publicized 13 percent share slide at end January, following the release of its 4Q2015 quarterly results, the company has announced a $5 billion buyback program to repurchase its own shares. “This stock repurchase authorization replaces the previous $2 billion stock repurchase authorization, approved by the Board of Directors in 2010,” as Amazon’s 8-K filing says. “The program allows the Company to repurchase its shares opportunistically from time to time when it believes that doing so would enhance long-term shareholder value. The repurchase authorization does not have a fixed expiration.”

Seeking Alpha‘s Brian Nichols speculated that “the move was possibly nothing more than PR. However, if AMZN buys quickly and launches a larger program, it could have a profound effect on AMZN stock.” Apple, he added, has also seen huge share gains off the back of such buyback programs. According to Reuters, Amazon still “had $763 million remaining under the previous plan,” so obviously the latter had still left the company with ample cash in hand to invest in growth.

A share buyback serves as one alternative to a dividend to redistribute profits to investors. It also allows a company to take a bet on itself, counting on a later rebound in its share value. Needless to say, a statement of confidence on the order of $5 billion can be a self-fulfilling prophecy, convincing investors that the company must be sure of its future. In Amazon’s case, this already seems to have happened. As reported in The Street on Thursday, Amazon’s stock had already recovered almost 3 percent on the news. The same report also quoted Morgan Stanley’s evaluation that Amazon’s stock is still almost 10 percent undervalued at just over $504 per share, and might eventually rise to $800. If so, Amazon might soon be back to exactly where it was in January – and after that, the sky’s the limit.

Amazon’s move also shows what it thinks of the critics who assailed it for not turning a bigger, more consistent profit. With up to $5 billion on hand to reinvest in itself, or in growth, Amazon obviously thinks it has plenty of room to do either, as well as opportunistically rewarding its shareholders through the buyback process. Would any of the Amazon-haters want to take a $5 billion bet against that? Didn’t think so.


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