Could e-commerce and cloud-computing giant Amazon (NASDAQ:AMZN) announce a stock split in the near future? It's quite possible. After all, shares are trading at a lofty $3,000 each.
Assuming shares are trading at this level at the time of a 6-for-1 split, it would put shares at a nice, even $500. Even better for shareholders unwilling to shell out $500 for a single stock, a 15-for-1 split could get shares down to about $200.
Stock splits have been all the rage lately in the financial media. Both Apple and Tesla recently split their stocks, making them more accessible to a wider base of investors. Apple split its stock on a 4-for-1 basis last month and Tesla split its stock on a 5-for-1 basis on the same day.
Perhaps Amazon will be one of the next megacap stocks to jump on the recent stock-split bandwagon.
Amazon already has a history of stock splits
A stock split wouldn't be a new idea for Amazon's board. Since the company's initial public offering in 1997, Amazon has split its stock three times:
- 2-for-1 in June 1998
- 3-for-1 in January 1999
- 2-for-1 in September 1999
With shares up 3,800% since the company's last stock split, it wouldn't be surprising to see Amazon execute another stock split soon. At $3,000 a share, the stock isn't very accessible to many retail investors -- particularly those whose brokers don't let customers buy fractional shares.
A stock split won't make Amazon stock more attractive
Investors should keep in mind that stock splits do nothing to make stocks better investments. A stock split is simply a form of financial engineering in which shares are split up while the value of a shareholder's total stake in the company remains the same. For instance, an Amazon shareholder's stake in the e-commerce and cloud-computing company would be the same before and after a 15-for-1 stock split.
The best way to visualize the mechanics of a stock split is to picture a pizza before and after it's sliced. Both before and after it's cut, the pizza is the same size and offers the same amount of underlying calories to be consumed. Similarly, a shareholder's ownership in Amazon will be the same both before and after a stock split. After a 15-for-1 stock split, the total value of the 15 shares will simply equal what one share was worth before the split.
Potential stock split aside, Amazon remains an intriguing investment. While investors have to pay a premium valuation (a factor that's notably unaffected by stock splits) to get in on this growth story, the company's business is booming. Second-quarter revenue surged 40% year over year to $88.9 billion, and operating income soared from $3.1 billion in the year-ago quarter to $5.8 billion. Positioned to benefit from the rapidly growing e-commerce and cloud-computing markets, Amazon's business will likely continue growing by strong double-digit rates for years to come.
With shares trading at an extremely high price of $3,000, and given the company's underlying momentum, it seems like a great time for Amazon to split its stock. Of course, there's no guarantee it will.