Amazon Stock Split: When To Buy?

The digital transformation of business is well underway. Related technology is advancing at a breakneck speed, allowing innovators to create intuitive software that automates a growing list of tasks. For example, developers are teaching computers to “think” with an eye on building self-driving vehicles, unmanned product delivery systems, and security that can stop cyberattacks at the source. 

There are a number of industries benefiting from the expanded use of digital tools, but two areas stand out in the current environment: e-commerce and cloud computing. Amazon (AMZN) is a leader in both. As of mid-2021, Amazon controlled more than 40 percent of the US e-commerce market, overwhelming the competition. In second place, Walmart had just seven percent. 

In addition to its dominance in the e-commerce space, Amazon Web Services (AWS) is the clear winner on the cloud computing side. In the third quarter of 2021, AWS had 32 percent of the cloud infrastructure services market – more than Microsoft Azure (21 percent) and Google Cloud (8 percent) combined. 

This astonishing success coupled with seemingly unlimited growth opportunities has made Amazon stock a favorite among investors.

The company has a massive $1.5 trillion market cap, and stock is trading at nearly $3,000 per share. It came as no surprise when, on March 9th, Amazon announced a 20-for-1 stock split will take place in early June 2022.

Share prices immediately shot up more than five percent, and investors are carefully considering their strategy to take advantage of this development. 

That brings up important questions. What happens when a stock splits? Is a stock split good for investors? How many times has Amazon stock split? And, of course, the most critical question of all: Is Amazon stock a buy? 

What Happens When A Stock Splits? 

The beauty of a stock split is that it isn’t a complex transaction. In fact, it is just as it sounds. A single share is divided into multiple shares. The new shares don’t increase the value of the company. Instead, the new shares combined equal the value of the original (now split) shares.

Imagine a pie. The pie represents a single share. In a 2-for-1 split, the pie is divided in half, and each piece is worth half the value of the original (whole) pie.

In a 20-for-1 split, the pie is carved into 20 slices, each of which is valued at 1/20 of the original pie. That’s what Amazon plans to do. 

For example, if on the effective date of the split, a single share of Amazon is valued at $3,000, then the split stock will be valued at $150.

Current shareholders will receive 19 additional shares for every share they currently own, leaving their underlying investment unchanged. To put it another way, after the split, for each original share at $3,000, they will own 20 shares at $150, totaling $3,000. 

Is A Stock Split Good For Investors? 

The market gets excited when a stock split is announced. Amazon stock went up five percent in a matter of hours. Some investors find that puzzling, considering the split doesn’t change the underlying value of the company. So, is a stock split good for investors? And if so, why? 

The primary reason stock split announcements tend to prompt an increase in share price is that splits are a concrete sign that the company is thriving – and that it expects additional growth. The need for a split means the company has been so successful that share prices have increased significantly – so much so that average retail investors are unable to buy them.

After a split, share prices often get a boost as new investors begin to buy into the company. There is also increased demand from investors who leverage options strategies, as options contracts are written for 100 shares. Selling cash-secured puts or generating income through covered call writing is not practical – and often not possible – when share prices are valued in the thousands. 

For Amazon specifically, this split may make the company eligible for inclusion in the Dow Jones Industrial Index, which is weighted by price. The Dow is made up of 30 companies that collectively represent the state of the economy in the opinion of decision-makers at S&P Global. 

The addition would be an impressive honor, and it would validate the general assessment that Amazon is a growing company with a strong reputation. From a demand perspective, being included in the Dow Jones Industrial Average means more interest from all types of investors, from small retail investors to the large exchange–traded funds (ETFs) that track this index.  

When demand goes up, share prices go up. In short, a stock split is good for investors because shareholders enjoy the returns associated with this increased enthusiasm and additional demand for the stock.

How Many Times Has Amazon Stock Split? 

Amazon held its IPO in 1997, and the first few years of trading were marked by multiple stock splits. Amazon stock split 2-for-1 on June 2, 1998, then 3-for-1 on January 5, 1999, and then 2-for-1 again on September 2, 1999.

However, after that third split, the company hasn’t had another until now despite its rapidly-rising share price. Since the last split, Amazon stock went up approximately 4,300 percent. 

There are a number of reasons why Amazon might have elected to pass on a stock split before now. For one thing, certain online brokerage firms have made it possible for retail investors to purchase fractional shares of select companies, putting high-priced stocks like Amazon back in their reach. 

There is also a general sense that high stock prices carry a level of prestige, indicating to prospective investors that the company is wildly successful based on its high stock price alone.   

Amazon Stock Split: Is AMZN a Buy?

Before news of the 20-for-1 stock split broke, analysts agreed that Amazon stock is a buy. After the announcement, that buy recommendation is even stronger. The company is a leader in two rapidly growing fields – e-commerce and cloud computing – and it is making impressive headway into the digital advertising space. 

Amazon certainly has competitors, but to date, none pose a significant threat – and it appears increasingly unlikely that new competition will crop up given Amazon’s seemingly insurmountable moat. 

Granted, Amazon won’t be able to sustain its pace of growth at the same rate it has delivered over the past two decades. However, most agree that it will achieve growth rates in the high teens for the next two or three years before dropping to the low-to-mid teens as 2030 draws closer. These projections indicate that shareholders can expect strong long-term returns. 

Finally, it is worth noting that along with the 20-for-1 stock split, Amazon announced authorization for $10 billion in buybacks. That’s also good news for shareholders, as buybacks increase the intrinsic value of outstanding shares. Perhaps more importantly, share repurchases indicate that the company believes the stock is a good value at the current price, making it a smart investment. 

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