A stock split is something of an enigma in the investing world. When shares split, it increases the number of shares on the market but decreases the price of the shares by the same ratio. As a result, nothing really changes regarding the company, and its market cap remains the same -- meaning the impact should be largely non-consequential.
Over the past several years, however, history has been turned on its head, with several high-profile stocks climbing significantly in the wake of their headline-grabbing splits. Some market watchers suggest that the "lower-priced" shares appeal to a greater cross section of the market, creating stronger demand for the stock.
With shares priced in excess of $3,300 per share, will Amazon (AMZN +0.43%) be next up to split its stock?
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You get what you pay for
Since its debut nearly a quarter-of-a-century ago, Amazon has become a household name, while simultaneously becoming the largest e-commerce provider in the world. The e-tailer was well-positioned when the pandemic struck and online shopping became the rule rather than the exception.
Net sales grew by 38% year over year in 2020, representing Amazon's biggest growth spurt in years. Since then, however, its growth rate has settled back down to historical norms so far this year, with sales up roughly 28% for the first nine months of 2021. As a result, Amazon's stock has more than doubled over the past three years, making it the fourth most-valuable publicly traded company in the U.S., with a market cap of more than $1.69 trillion.
With brokers increasingly providing the option to buy fractional shares, having a "high" stock price shouldn't matter, but it appears that it's all about perception. Some investors see a sticker price of more than $3,300 and automatically label the stock as "expensive."
It's worth noting that taking the stock price out of context is essentially meaningless and should never be a factor when deciding to purchase a stock. Increasing sales, widening profit margins, and new lines of business are much more relevant to the decision than the stock price viewed in a vacuum.
Splitting hairs
Nothing fundamentally changes about a business when it institutes a stock split. In a 2-for-1 split, for example, a company will end up with twice as many shares that are half their previous price. The closest analogy is buying a pizza and cutting it into 16 slices instead of eight -- you still have the same amount of pizza, just apportioned differently.
In recent years, however, that hasn't stopped investors from bidding up the share price after a stock split, as several high-profile examples attest. Since Apple announced a 4-for-1 stock split on July 30, 2020, its shares have climbed 76% (as of this writing), easily eclipsing the 41% gains of the S&P 500. Since Tesla declared its 5-for-1 stock split on Aug. 11, 2020, shares have soared an impressive 190% vs 35% for the S&P -- even after Tesla's recent, highly publicized dip.
Nvidia is another well-known example, announcing its stock split on May 21, 2021. Since then, the stock has surged 77%, crushing the 9% increase of the S&P.
Taken together, this seems to suggest that a stock split, as non-consequential as it should be, appears to attract a greater number of potential investors, pushing the price higher -- at least in the short run.
Image source: Getty Images.
Is an Amazon stock split imminent?
Amazon was a serial stock splitter during the dot-com era. The company instituted three share reapportionments, with a 2-for-1 split in June 1998, a 3-for-1 split in January 1999, and a 2-for-1 split in September 1999. Since then, however, Amazon has gone largely silent on the subject.
It's worth noting that there's been a significant changing of the guard at Amazon in recent months, with cloud-computing maven Andy Jassy assuming the mantle of CEO from founder Jeff Bezos. Since taking the helm at the e-commerce giant, Jassy hasn't broached the matter, but since Amazon is one of the highest-priced, publicly traded stocks in the U.S., there's little question the subject has been raised.
Truth be told, we simply don't know if Amazon will split its stock any time soon. However, stock splits are suddenly all the rage again, and all the popular kids are doing them. I wouldn't be surprised to hear that an Amazon stock split is in the cards.
