The Amazon stock split will dilute the value of each share by a factor of 20, without affecting the e-commerce giant's inherent value. Its new CEO, the Dow Jones, and renewed share price momentum all factor.
The Amazon (NASDAQ: AMZN) share price is going to fall by 95% on 6 June 2022.
However, unlike Meta, Netflix, Peloton and dozens of other big tech stocks, Amazon’s share price fall is a pre-meditated action taken for the benefit of shareholders. Joining Apple, Tesla, Nvidia and Alphabet, it’s announced a 20-for-1 stock split; its first since the pre-historic days of 1999.
To be clear, if the stock split were happening today, an investor who owned one Amazon share at the current price of $2,910 would find themselves with 20 shares worth $145.50 each.
Accordingly, the stock split will not fundamentally change the value of the stock or the business that underlies it. However, here are three potential reasons why the Amazon stock split is happening now.
1) Amazon’s fresh CEO
Founder and former CEO Jeff Bezos had previously stressed the importance of long-term strategy over short-term financials, famously refusing to partake in quarterly earnings calls.
But new CEO Andy Jassy may be a different breed of excecutive. Like Bezos, he has also chosen to stay away from quarterly earnings calls. But he’s also shied away from the press, and largely stayed off social media.
In addition to the stock split, Amazon announced a new $10 billion share buyback, its first since a $5 billion repurchase scheme in 2016, of which only $2.12 billion was used. It could be that Jassy, now comfortable in his new role, has been appointed as custodian for the next stage of Amazon’s life cycle.
Amazon saw full-year net sales rise 22% to $469.8 billion in 2021. But the world is changing. Already the largest e-commerce outfit in the world, Amazon would have to increase sales by $103.4 billion to grow sales another 22% in 2022. And it will be contending with global supply chain disruption worsened by the Ukraine crisis, as well as soaring inflation, interest rates and personal debt in its key markets.
Jassy could be moving Amazon into a consolidation stage while the world’s economy reboots. Stock splits, share buybacks, potentially even dividends could convert Amazon into a defensive stock while global markets reconfigure.
This marks a significant policy divergence from previous CEO and current Chairman Bezos.
2) Amazon share price momentum
Alphabet, Tesla, Apple, and Nvidia are far from their share price highs, but they are all up significantly since their stock splits. Meanwhile, Amazon’s share price is worth what it was in July 2020. And after sliding from $3,696 since 18 November to $2,910 today, pressure on the new CEO to arrest the slide remains intense.
And psychologically, retail investors and employees may be more likely to purchase the stock if they can buy multiple whole shares, rather than part-purchasing. In Amazon’s own words, the split provides ‘more flexibility in how (employees) manage their equity in Amazon and make the share price more accessible for people looking to invest in the company’.
Wedbush analyst Dan Ives believes ‘even though they (stock splits) doesn’t change the valuation, from an individual investor perspective, (the high price) would make the stock less appealing.’
3) Primed for Dow Jones inclusion
Amazon’s stock split could see it join the prestigious Dow Jones Industrial Average index; as the index is price-weighted, Amazon’s current share price would carry too much influence. But after the stock split, it would then meet the eligibility criteria. The last company to join the Dow was Apple in March 2015, nine months after it completed a 7-for-1 stock split.
DataTrek co-founder Nicholas Colas argues that while Amazon’s management are unlikely to care about inclusion in the Dow Jones ‘from a purely financial perspective,’ they ‘perhaps’ care from ‘the perspective of corporate recognition.’
And potentially, as monetary policy tightens, more investors will seek the safety of the Dow Jones’ ultra-blue-chip offerings.
Moreover, Deutsche Bank analyst Lee Horowitz recently released a bullish note on the company’s prospects. Horowitz believes Amazon’s retail sales will grow by 25% this year, double the Refinitiv average analyst estimate, driven by ‘ongoing share gains in the massive grocery market…ranked as the top grocer amongst consumers.’ And he highlighted its AWS Web Services division’s ‘$80 billon in gross backlog additions,’ which could drive revenue from $62 billion in 2021 to $83 billion in 2022, and towards $107 billion in 2023.
The Amazon stock split is investor-friendly, and fellow tech stocks have found success in the strategy. But past success is no future guarantee. The Amazon share price may not dance to Jassy’s tune.
*Based on revenue excluding FX (published financial statements, June 2020).