Will Amazon Stock Split?

Will Amazon Stock Split? There are plenty of reasons why a company would choose to initiate a stock split. But the first thing to note when talking about a stock split is that the procedure does not add, nor subtract, any value from the company. The market capitalization of the firm is the same after the undertaking as it was before.

So, why go to the trouble of a stock split if it makes no material difference to the value of a company?

Why Do Stocks Split?

Well, one reason is fairly straightforward: a stock split is really just a psychological maneuver – it lowers the share price of a company’s stock to a point that potential investors are more comfortable buying in at, which in turn expands the company’s ownership base – thus attracting more investment and funds into the business. 

For example, investors normally prefer buying 10 shares at $100 than they do buying one share at $1,000. It might seem superficial, but the phenomenon is quite real.

Furthermore, the standard trading unit for a share purchase is known as a Board Lot – this number can vary, but many exchanges set it at 100 shares. For a business to have its share price trading in the region where buying a Board Lot is feasible is a big deal for a company.

And stock splits often result in extra market liquidity for a company too. Increased liquidity contracts the bid-ask spread, and makes it easier for investors to make the trades they want at the specific price they’re looking for.

Will Amazon Stock Split?

There’s rarely any specific catalyst that compels a company to make a stock split, but there are general conditions that might make it more likely than not to happen.

As is happening now with Amazon, there’s been speculation recently that the e-Commerce giant is close to commencing its own stock split. FOX correspondent, Charles Gasparino, had been tweeting about it prior to its latest earnings call, causing Amazon’s share price to spike upwards.

On the criteria we mentioned earlier, Amazon as a company is a prime candidate for an immediate stock split. Its share price is extremely high in absolute terms, and a split at this point in time would make sense. And it hasn’t been shy of making stock splits before; the firm has made three previous splits, each one between 1997 and 1999.

In addition to its high price, Amazon could also benefit from a split now to gain it entry into the prestigious Dow Jones Industrial Average. The problem at the moment is that the Dow only admits firms with relatively lower share prices, since the index is weighted, and a company with a higher-than-usual trading number would unbalance this weighting.

So what’s stopping Amazon from splitting its stock right now? To begin with, a stock split now probably wouldn’t entitle the company to a seat at the Dow Jones table; for that to happen, Amazon would need to split its stock by a heavy multiple, something which most businesses don’t enjoy doing. 

Secondly, the era of the stock split might be coming to an end. Because retail investors can now purchase fractional shares from many brokers and exchanges, this negates one of the major reasons for a stock split i.e. to expand the stockholder base.

Investors don’t have to worry about not being able to afford a Board Lot anymore; the can simply buy a tenth of an Amazon share if they feel like it.

What Happens If Amazon Does Go Ahead With a Stock Split?

Even though there are arguments against performing a stock split, recent history shows that some of the biggest companies are still quite willing to do so.

Apple (AAPL) and Tesla (TSLA) have both split their stock in the last few years, and it is likely Amazon will do so at some point in the future.

And if it does, the company will have to decide on what kind of split they want to undertake. The main consideration here is the ratio by which the stock will be divided. Typical ratios are usually anywhere between 2-to-1 and 10-to-1.

Last year, for instance, Apple choose to do a 4-to-1 stock split, which meant that for every share an investor held, they would now hold four shares instead. The overall value of the company stays the same, but each share would now trade at a quarter of its former price.

Will AMZN Stock Rise Or Fall After It Splits?

Obviously, the golden question for investors is: what will happen to Amazon’s share price if it does split?

Assuming all other things are equal, most market theorists claim that after a stock split the price of company’s shares will rise.

This is partly because of the psychological factor we alluded to earlier, since price discovery will tend towards its previous value and take the stock back to its original price point.

Also, some people see the stock split as a positive signal about the health of a company, and decide to buy stock on this basis – which itself is a driver for higher share prices in the short-term, at least.

However, this isn’t the entire story. Stock splits can actually stabilize a company’s price movement, as more stock holders means less volatility, which leads to fewer price swings and more steady trading patterns.

Is AMZN Stock Split Good Long-term?

Given the strength of the Amazon brand at the moment, there’s little reason not to view a stock split as a good thing.

The company had a phenomenal first quarter in 2021, and is on track for a yearly revenue of $400 billion. Net income is also growing sequentially, and analysts predict it could make a bottom-line of $50 billion in 2022.

The business is firing on all cylinders, with expansion of its key verticals under way, as well as a move into new segments – such as Last Mile Delivery – and additional features to its legacy products like Alexa and Amazon Music.

So yes, a stock split will be good for Amazon going forward. 

And because of an imminent change in management at the company, the prospects of a split seem more likely now than at any time in the previous two decades. Given that the last stock split at Amazon happened 22 years ago, expectations at at fever pitch this time round. 

If you’re convinced of the upside that a stock split will bring, now might be a good time to either add to your Amazon holdings, or maybe make a first purchase of this stellar stock.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.