Amazon.com (AMZN -3.52%) knows that it can't set the prices for the products it sells too high. If it did, the company would limit its opportunity because some consumers wouldn't be able to afford its products.
This same concept applies to Amazon's stock price as well. With the internet giant's shares trading above $3,300, many investors can't afford to even buy one share. That's why Amazon announced last month that it plans to do a 20-for-1 stock split.
If history is any guide, this could prove to be a smart move for the company. Amazon's shares soared at least 48% in each of its last three stock splits. Can the stock do it again?
Three big moves
Amazon first listed its shares on the Nasdaq stock exchange on May 15, 1997. It didn't take very long for the stock to nearly quadruple. The rapid rise prompted Amazon to conduct a 2-for-1 stock split on June 2, 1998.
The result of Amazon's first stock split was fantastic. Shares almost immediately took off again. Within weeks, Amazon's stock price had more than doubled. The momentum continued for months with a few pullbacks along the way.
Only a few months later, Amazon's board of directors decided that a second stock split was prudent. The company announced a 3-for-1 split scheduled for Jan.5, 1999. Did this move stoke investor interest again? Yep. Amazon's share price skyrocketed 48% in less than one week.
That gain didn't last very long. By mid-February 1999, Amazon's shares were down more than 25%. However, the stock bounced back with a vengeance. Surprisingly, Amazon announced yet another 2-for-1 stock split on July 21, 1999. Its stock at the time was barely above its level at the previous stock split.
Amazon's third stock split in a little over two years took place on Sept. 1, 1999. Within six weeks, the stock again jumped 48%.
The stock was highly volatile afterward, though. Amazon gave up most of the initial gain before vaulting higher. But 2000 ushered in the end of the dot.com boom. Amazon's stock plunged along with most tech stocks.
The fourth time's the charm?
So can Amazon's share price soar 48% or more again when its stock splits 20-for-1 on June 6, 2022? I wouldn't count on such a huge quick gain.
Amazon is in a much different place than it was when it last had a split stock nearly 23 years ago. The company's market cap now stands at nearly $1.7 trillion. It's not impossible to add roughly $800 million in valuation in a short period of time. However, the odds definitely aren't in Amazon's favor to jump 48% within a matter of months.
On the other hand, I wouldn't be surprised at all if the stock split coming up in June provides a nice bump for Amazon's share price. Many investors who would have never considered buying the stock at $3,300 could hop aboard at a share price of below $200.
But there are better reasons to buy Amazon stock before it splits than the stock split itself. The company's Amazon Web Services cloud unit is rocking. Amazon Prime Video seems likely to attract even more customers with NFL Thursday Night Football and a Lord of the Rings series on the way.
We can't even be sure that Amazon's last three stock splits were the main reasons driving those impressive gains in the past. What we can be sure of, though, is that a stock price tends to move higher as a company's underlying business expands. And stock split or not, Amazon's business is expanding.