Last night, Amazon (AMZN -1.63%) announced that it would be splitting its stock 20-for-1, the first time this $3,000 stock has split its shares since September 1999! In conjunction with the stock-split announcement, Amazon also upped its share repurchase program to $10 billion, from the $5 billion program that had been in place. On the announcement, Amazon shares soared nearly 7% in after-hours trading Wednesday.
So, should investors follow management's hint and buy shares ahead of the split?
Following Alphabet's lead
Amazon's move had been a topic of conversation among investors ever since CEO Andy Jassy took over the reins from founder Jeff Bezos last summer, and more recently after FAANG competitor Alphabet (GOOG -0.32%) (GOOGL -0.35%) announced its own stock split back in February.
Stock splits do not increase or decrease the value of the company, of course; they merely divide shares up into smaller, bite-size pieces. But they do make buying the stock easier for smaller shareholders who may not have $3,000 to invest. The advent of brokerages offering fractional shares has somewhat mitigated this problem for the small buyer, yet many investors still retain brokerage accounts that don't offer fractional shares. So the split could have some effect on a stock's liquidity and options activity.
Some CEOs don't like the enhanced liquidity that comes with a lower share price. Notably, Warren Buffett has never split the shares of Berkshire Hathaway (BRK.A -0.76%) (BRK.B -1.07%), which now go for a whopping $488,245 per Class A share! Buffett didn't want to attract short-term investors looking to make a quick buck, and more-liquid, lower-priced shares have a tendency to make bigger moves up and down with more trading activity.
That being said, Berkshire was forced to offer lower-priced Class B shares in 1996, in order to head off the formation of investment trusts that allowed smaller investors to have a "piece" of Berkshire -- for a fee, of course.
It appears Jeff Bezos took a page out of Buffett's playbook following the dot-com crash of the early 2000s, never splitting Amazon's stock again after it crashed more than 90% during that period.
So why the stock split now?
Obviously, Amazon's stock has done quite well since it last split. But as shares soared above $3,000, they've hit a roadblock, especially compared with other high-profile tech stocks that have split during the past two years:
AMZN data by YCharts.
Could this underperformance have to do with the lower liquidity in Amazon's stock? It's hard to say, but it's possible management might be feeling some heat from employees (many of whom get paid in Amazon stock) over the stock's recent performance. Amazon has doubled its employee count since the beginning of the pandemic and is in a global war for tech talent, so a lagging stock price could affect its ability to hire top engineers.
As you can see above, shares have badly lagged the market and many of its large-cap technology peers over the past 20 months or so. Alphabet, Apple, Tesla, and Nvidia have each split their stock at some point over the past 20 months, with Apple and Tesla splitting in August 2020, Nvidia splitting in July 2021, and Alphabet just recently announcing its split, which has not yet taken effect.
It's not clear if this is the reason for their outperformance; investors have been wary of e-commerce stocks amid economic reopening and higher inflation. But it appears management may think this is at least part of the reason.
Don't buy Amazon for the split, though; buy it for these reasons
While many view Amazon as an unbridled growth stock, investors should not underestimate the company's capital allocation prowess. More than the stock split, investors should buy the stock because it appears cheap on the basis of the sum of its parts, and it looks like management feels the same way. And there are many smart people working at Amazon.
The fact that Amazon is getting aggressive with share repurchases is telling. Under Bezos, Amazon sought to spend as much money as possible on growth ventures, so the fact that management is upping share repurchases means it must see its stock as woefully undervalued.
Amazon also is coming off a massive two-year investment cycle since COVID-19 hit, but that should be winding down now as growth trends normalize. So free cash flow could skyrocket this year as Amazon spends less on building its fulfillment network, which has more than doubled since the beginning of the pandemic.
Amazon has repurchased shares before, but only rarely and in small amounts. The last repurchase was at the end of 2011 and beginning of 2012, after the stock fell some 25%. That's roughly the same plunge shares have taken recently. Investors would have been good to follow management at that time, as Amazon's stock bounced back in a big way beginning in late 2012 and beyond.
Amazon Web Services could be worth more than Amazon's entire market cap. Image source: Getty Images.
Amazon Web Services could be more valuable than all of Amazon today
Additionally, while most think of Amazon as an e-commerce company, I'd argue its Amazon Web Services (AWS) cloud computing platform is the bigger reason to own the stock, and it might be worth more than all of Amazon's e-commerce operations, or even more than the company's entire market cap today.
Consider that AWS grew revenue 37% last year to $62.2 billion and operating income by roughly the same amount to $18.5 billion. However, AWS revenue and operating earnings accelerated throughout the year as economic activity picked up, with growth accelerating 40% in the fourth quarter.
Assuming 35% growth this year, AWS operating income would come to $25 billion; after tax, that would come to about $20 billion in net earnings. At a $1.4 trillion market cap, all of Amazon is trading around 70 times AWS earnings for 2022.
I have a feeling that if AWS were a separate business, it could garner a P/E ratio in that ballpark. So investors could be getting Amazon's e-commerce operations, which are also likely quite valuable, for free.
The split should come in June
According to the Securities and Exchange Commission filing, Amazon shareholders will have a vote on the stock split at the company's annual meeting in May, and the split should take effect sometime in early June, pending that shareholder vote. Assuming the split is a catalyst for shares to go up, I hope management spends a large portion of that $10 billion share buyback before then.
After a no-good year and a half, 2022 could be a much better year for Amazon shareholders. It's screaming buy with the stock split on the horizon.
