Amazon (AMZN -3.49%) stock has soared in recent years, topping $3,600. And that has prompted investors to wonder whether this unstoppable player would at some point announce a stock split. Such a move doesn't change a company's total market value. But it lowers the value of each individual share. And that often makes it easier for the stock to multiply once again.
Today, Amazon investors -- and potential investors -- may wonder if they should scoop up shares ahead of the split. Or if they should wait until afterward. It's set for early June. Let's look at two reasons to take the plunge now -- and one reason to buy after the stock split.
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1. Reason to buy now: The stock is heading higher
Amazon shares soared during the early days of the pandemic. They rose 76%, surpassing $3,000 for the first time back in 2020. Last year, they continued to climb. But momentum slowed -- and the stock finished the year with a gain of less than 3%. Why the change in sentiment? Various elements came into play. One concern was that the stellar growth during the pandemic wouldn't continue post-pandemic. Another was about challenges to retail businesses today: labor shortages and rising costs due to inflation. And, finally, investors worried about the stock's potential. A stock that costs thousands of dollars doesn't climb as easily as one that costs hundreds.
Since the stock split announcement, momentum has picked up. The stock is heading higher. Amazon now is down less than 4% this year. That's compared to a decline of about 18% as of earlier this month. The split announcement offered a boost. Leading up to the split and following the operation, we may see continued optimism. So, investors buying the stock today may benefit from gains in the coming months.
2. Reason to buy now: A reasonable price for what's to come
As I said above, Amazon may be on its way higher. But the price today still looks reasonable. For instance, Amazon is trading at 65 times forward earnings estimates. That's down from more than 90 just a few months ago.
At the same time, Amazon has been investing heavily in its business. It's scaling its fulfillment network, investing in its Prime subscription service, and expanding the reach of cloud computing unit Amazon Web Services (AWS). All of this has a cost in the near term. This, along with outside elements like inflation, means earnings growth may not be as impressive in the coming months as it was earlier in the pandemic.
But that's OK. These investments of today should drive major growth at Amazon tomorrow. For instance, AWS represents about 74% of Amazon's operating income. AWS aims to open 24 more data center clusters and eight more areas where it operates these clusters. It's never too early for a long-term investor to get in on such a story.
Reason to buy after: It will be easier to make a small investment
If you want to buy Amazon right now, you'll have to fork over about $3,225 per share. There is a way to make a smaller investment though. You can buy fractional shares. Of course, some brokerages don't offer fractional shares. And some investors prefer buying at least one full share of a company. Now I'm getting to the reason to buy Amazon after its stock split...
The lower share price will make it easier for you to make a smaller bet on Amazon. After the 20-for-1 split, each individual share will be priced at around $150. So, an investor can spend a few hundred dollars -- and end up with more than one share of the company. Basically, the split offers investors who don't opt for fractional shares a bit more flexibility.
So, should you buy Amazon before or after the split?
As you saw above, there are reasons for both. And there isn't a right or wrong decision. If you plan on buying Amazon and holding, it doesn't really matter if you invest today or several months down the road. Amazon has a solid growth track record.
AMZN Revenue (Annual) data by YCharts
And it has plenty of potential to increase earnings well into the future. Share performance likely will follow. So, an investment in this retail giant at any point can result in a major win for long-term investors.
