There's little question that Amazon (AMZN -1.65%) revolutionized e-commerce, from its humble beginnings as an online bookstore on its journey to becoming the "everything store." The company has become synonymous with digital retail and dominates the U.S. e-commerce landscape. Amazon also pioneered the concept of modern cloud computing and is now the leader in that sector too.
The company's enviable business performance has given rise to a surging stock price. Amazon shares have climbed roughly 80% since early 2020, and are up an impressive 227% and 1,380% over the preceding five-year and 10-year periods, respectively. As a result, Amazon shares recently clocked in at nearly $2,800 per share -- but all that's about to change.
Word dropped late Wednesday that Amazon plans to split its shares for the first time since 1999. This revelation is causing investors to take a fresh look at the company and its stock. Let's recap just how a stock split works and what it means for investors.
Image source: Getty Images.
The details
Amazon disclosed in a regulatory filing that its board of directors had approved a 20-for-1 stock split. This will also result in a proportionate increase in the total number of shares. The action will also be subject to shareholder approval at the company's 2022 annual meeting on May 25. Assuming Amazon investors approve the measure, shareholders of record as of May 27 will receive 19 additional shares of stock for each share they own, with the distribution occurring on or about June 3. The stock will begin trading on a split-adjusted basis June 6.
The company's shareholders won't have to take any other action in order to receive the additional shares. As is normally the case, the brokerage will handle the details behind the scenes and the additional shares will simply appear in investor accounts.
It's important to note that the newly minted shares may not show up immediately at the end of the trading day on June 3. The timing can vary between brokerages and can take up to several days to appear in investing accounts -- but rest assured, they will show up.
Let's do the math to help add some much-needed context. For each share of Amazon stock a shareholder owns -- currently trading for nearly $2,800 per share (as of this writing) -- post-split, investors will own 20 shares worth $140 each.
Does that mean a stock split is good or bad?
A quick review of the above example illustrates that the total value of their shares doesn't change. One share of Amazon stock currently fetching $2,800 will be worth the same amount as 20 post-split shares priced at $140 (20 x $140 = $2,800). Much like slicing a pizza, it really doesn't really matter if you cut the pie into eight slices or 16 slices; you still end up with same amount of pizza to eat. Likewise, Amazon investors will simply have a larger number of lower-priced shares.
Image source: Getty Images.
Consequently, investors shouldn't buy shares just because of the pending stock split. History suggests that an increase in a stock's price resulting from investor enthusiasm is usually temporary. Additionally, there are those who believe that the lower share price will fuel a corresponding increase in demand for the stock, but that, too, is normally short-lived. However, given Amazon's history of consistent business performance and the resulting impressive financial results, investors might want to give the tech giant another look.
Does that mean Amazon stock is a buy?
While the stock split itself doesn't suggest that Amazon is a buy, there are a host of other reasons to consider an investment in the tech giant. A look at the company's most recent financial report lays out the case quite nicely.
Last year, Amazon generated revenue of $470 billion, up 22% year over year. At the same time, its net income of $33 billion surged 57%.
Amazon's worldwide e-commerce sales increased 20% last year, which is impressive considering that this was on top of pandemic-fueled gains of 39% in 2020. Amazon Web Services (AWS), the company's industry-leading cloud computing segment, grew 37%, representing 13% of Amazon's total revenue and 75% of its operating income in 2021. That's laudable growth, particularly for a company with a $1.42 trillion market cap.
There are other reasons to be optimistic. Amazon has become a powerhouse in the world of digital advertising, controlling 10% of the U.S. digital ad market last year, and nearly 6% worldwide.
Furthermore, in conjunction with its stock split, Amazon said its board of directors authorized a stock buyback of up to $10 billion of the company's common stock. That replaced the previous $5 billion plan, under which the company has repurchased $2.1 billion of its shares.
There's little question that both e-commerce and cloud computing will only continue to grow from here, and Amazon's industry-leading position in both of these fields suggests the company has a bright future. That said, investors shouldn't buy Amazon shares based solely on the pending stock split. Rather, it's the company's history of ongoing robust performance in not one, but two secular trends, that makes Amazon stock a buy.
