Watch now on Youtube: Why is Amazon UP after Stock Split?
First time ever since 1999, Amazon announced that they are doing a 20:1 stock split.
What is a stock split, and the benefits of it?
What this means for current Amazon shareholders?
And if you’re not yet invested in Amazon, should you buy the stock BEFORE or AFTER the split?
What is a stock split?
To best illustrate what is a stock split, we can use the analogy of a pizza.
Imagine a company’s shares represents one full pizza.
If the company announces a 4-for-1 stock split, each shareholder will get three additional shares.
The price of the original share will be divided by four, so that means a share trading at $400 would trade at $100 after the split.
Stock splits are cosmetic. The value of the share is the same, it is just split into more slices. There is no dilution of shares.
In the case of Amazon, the shares are split into 20:1 ratio.
Amazon is trading at a price of about $3000 USD per share (as of March 25 2022).
After the 20:1 split, if you own 1 share of Amazon, you will get 19 more shares.
The price of the original share currently, at about $3000 will be divided by 20, so that a share costs $150 after the split.
Benefits of stock splits
Better stock price performance
Historically, companies that do stock split have better stock performance.
According to analysts at Bank of America, since 1980, S&P 500 companies that have pursued splits tend to see shares outperform the index three, 6-12 months after the announcement (NASDAQ).
Increases liquidity
Another key benefit of a stock split is that it increases liquidity.
Liquidity is not really an issue for Amazon, since about 4 million shares per day are traded.
Why Is Amazon doing a stock split?
That said, I think there are 3 reasons why Amazon is doing a stock split:
Give employees more flexibility in managing equity
Instead of giving them 1 share of 3000, they can buy at a smaller demonination.
Improve investor sentiments
Since Andy Jasy joined as the CEO of Amazon, improve investor sentiment about Amazon’s stocks
Greater accessibility for investors and traders
Last but not least, the stock split enables retail investors and traders to take advantage of Amazon’s stocks at a lower price.
If you want to own Amazon stocks but can’t afford $3000 for one share, the stock split allows you to own AMZN shares at about $150.
This is a great benefit, especially if you are not able to trade fractional shares.
It’s also easier for you to dollar cost average and rebalance your portfolio, given the smaller denomination of $150 per share.
In the options market, after the split, the minimum amount to sell put options is about 15K (100 x 150 per share) compared to before the split, where each
Should You Buy Amazon Stocks Now?
The decision to buy Amazon should not be whether the company is doing a stock split.
Ultimately, it still boils down to fundamentals and valuation.
Let’s look at Amazon’s performance.
Amazon Prime
Amazon recently raised their prices for their Prime memberships.
For new members in the U.S, Prime membership prices has increased from $119 to $139 since 18th February.
This highlights Amazon’s pricing power, as they can command premium pricing to consumers.
The $20 difference, multiplied by millions of prime users in the US is pure profit.
Amazon Web Services (AWS)
Amazon also continues to invest heavily in AWS.
AWS has generated $17.78 billion which represents a 40% growth YoY.
Advertising revenue
Advertising revenue also increased to top 3 in 2021, at 31 billion dollar (which is a 57% growth since its previous year)
- Google Search: $149B
- Meta: $115B
- Amazon: $31B
Growth in the past 3 years:
- $12.6B
- $19.8B (+57.1%)
- $31.2B (+57.6%)
Amazon is a company with high margins, huge profitability, and moat that it has developed over the years.
With a long run way for growth and a good management team, Amazon is a company that I’m excited to own for the next 10-20 years.
Disclaimer: This article constitutes the author’s personal view and is for educational purposes only. It is not to be construed as financial advice in any shape or form. From time to time, the author may hold positions in the below-mentioned stocks consistent with the views and opinions expressed in this article.
