Amazon's (AMZN 0.81%) shares are set to open on Monday for a much lower price than we're used to seeing. That's because the retail giant is completing a 20-for-1 stock split. The move doesn't change the market value of the company -- or the value of your investment in Amazon. But, in offering current investors more shares, Amazon is bringing down the value of each individual share.
Splits make it easier for a broader range of investors to invest in stocks that have climbed to high levels, often into the thousands of dollars. For example, Amazon shares have been trading at around $2,400. As of Monday, they'll trade at the split-adjusted price of about $120. The stock could get a lift as new investors flock to it. Or will one particular thing hurt Amazon's post-split performance?
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An element that has already hurt earnings
So, what is this element that may weigh on Amazon? It's an element that already has hurt the company's earnings and stock performance. I'm talking about higher inflation. Amazon -- and retailers in general -- often struggle in times of rising inflation.
Higher transport costs, higher wages, and even higher utility prices to operate Amazon Web Services' (AWS) data centers put pressure on Amazon's first-quarter earnings. For example, Amazon said the cost of shipping containers internationally has more than doubled from its pre-pandemic level.
At the same time, Amazon says it's sticking to its commitment to "low competitive pricing." So Amazon can't just pass on all additional costs to consumers. This is positive because it will keep customers coming back. But it also means Amazon's earnings may continue to suffer in the near term.
In fact, CFO Brian Olsavsky predicted during the Q1 earnings call that higher costs "will persist a little longer than we were hoping at the beginning of the year."
Interest rates are on the rise in the U.S. And the European Central Bank (ECB) may lift rates three times this year, an ECB official told Politico last month. These moves are meant to tame inflation. But results won't be seen overnight. And that means Amazon and other retailers may have to find ways to manage in the meantime.
What some investors may do
Now, let's get back to Amazon's share price. Some investors may not want to pick up shares of a company that heavily depends on transporting goods worldwide at a time of rising inflation. They might opt to wait and see exactly how long this negative environment lasts. This could hurt Amazon's post-split performance.
But if that happens, I wouldn't worry. Even if the inflation problem lingers for longer than we expect, it's not going to be around forever. Meanwhile, Amazon is taking steps to control the costs that it can control, such as those linked to productivity and the use of its recently expanded fulfillment network. These efforts will pay off once the general economic environment improves.
At the same time, one of Amazon's key businesses is booming. AWS, the cloud computing business, saw net sales and operating income climb in the double digits in Q1. The momentum may continue. That's because AWS isn't as sensitive to inflationary pressures as Amazon's e-commerce business. So, AWS could help buoy Amazon through these tough times.
And all of this means, a few years from now, it won't really matter whether Amazon stock rose or fell in the weeks following its stock split. Steady growth over the long term will be most important. And it's very possible Amazon can make that happen.
