It didn't last long, but Amazon.com (AMZN -1.64%) hit $1,000 in intraday trading on Tuesday and Wednesday. The brief trips into quadruple digits were the toast of financial media, but let's cut to the chase: Amazon, now would be a pretty good time to do something that you haven't done since 1999 -- and I'm not talking about selling a survival guide to Y2K or a "Mambo No. 5" CD maxi-single.
Split your stock, dude. I don't care about the actual fraction. Whether you play it safe and go 7-for-1 or a more brazen 12-for-1 maneuver, now is a good time to shake things up. You rolled out three stock splits in a mere 15 months during the dot-com bubble days. Times have changed, and they're not as necessary as they used to be, but there are a few good reasons to consider going this route.
Image source: Amazon.com.
1. Let's not make falling south of $1,000 awkward
Now that Amazon has crossed the $1,000 finish line, its success will be measured by whether it's trading in three or four digits. There's little to gain, psychologically, when it's trading above $1,000, but every day that it closes below that will be measured against the mark it once crossed in the waning moments of May.
Amazon's an amazing company. It's now a 666-bagger since going public 20 years ago at what is now a split-adjusted $1.50. There is no reason to expect the good times to end here for the country's most valuable retailer. However, the market can be fickle, and there's no point in playing a waiting game until it hits $10,000 when the market feels that it's 10 times the company that it is today.
A split blurs the silly race to round numbers. When Apple (AAPL 1.27%) split its stock 7-for-1 three years ago -- with the price approaching $700 -- it was its way of bowing out of the mind-bending marathon to $1,000 that tech giants seemed to be having. It actually beat Amazon there, but there were no confetti launchers going off when it crossed $142.86 in late March of this year ($1,000 adjusted for the 7-for-1 split). Apple is all the better for not having that distraction. A stock split clears the slate. Amazon can now check off "hit $1,000" off its bucket list and get back to business.
2. Dow shall not
A more important reason to be an astute bowler and pick up the split is that it's the only way that Amazon will ever get into the Dow Jones Industrial Average. It isn't easy getting into the Dow, as the oft-cited benchmark consists of just 30 bellwethers. This isn't the S&P 500 or Nasdaq 100 that Amazon was able to check into with ease once it got big enough.
The Dow 30 is a price-weighted index, and that means that, unlike the market cap-based S&P 500, the actual price of a stock determines how heavy an influence it is in the benchmark. Amazon's stock price is higher than the Dow's 15 lowest-priced components. It is more than four times greater than the second-largest stock in the index. There's no way that it's getting into the Dow when it has more power to move the index than half of its members combined.
It's not a coincidence that Apple wasn't handed the Dow's equivalent of a green Masters jacket after its 7-for-1 split. Amazon's Dow-worthiness is debatable at this point, but it will inevitably happen -- and only after a significant split so it doesn't rock the index.
3. Looking out for the little guy
Amazon bumped the minimum order size for standard free shipping for non-Prime shoppers from $25 to $35 four years ago, and that became $49 last year. It didn't stick. Amazon went back down to $35 in February, and full circle back to $25 last month.
Obviously, Amazon felt that it was missing out on sales in this competitive marketplace, especially to folks that haven't sworn their loyalty to Amazon by shelling out annual fees to go Prime. We can say the same thing about investors. We live in a golden age of dirt-cheap brokerage commissions. It costs a lot less at the major online brokers to complete a stock trade than it did when Amazon was popping splits as if they were Pez candy in 1998 and 1999. Young investors or folks without a lot of money to throw at the market right now can build a position over time thanks to these cheap commissions. However, you can't buy less than a single share, and for someone with a small portfolio who wants to diversify an initial position of $1,000, that may be too high a barrier. In short, a stock split opens up Amazon as an investment to a wider pool of investors -- many who will likely shop at Amazon because you may as well put your mouth where your money is.
