You might have cheered when Amazon (AMZN -1.64%) announced its 20-for-1 stock split -- whether you're already an Amazon investor or just thinking of buying the stock. That's because a stock split opens the stock up to a broader range of investors. In a split, the market value stays the same. But the company issues more shares to current holders. As a result, the price of each share decreases.
Amazon stock rose on its first day trading at the split-adjusted price. It advanced 2%. But the next day, the stock slipped 1.43%.
It's reasonable to imagine investors flocking to Amazon shares at the new, lower price. So why isn't that happening in a big way? Let's find out.
Image source: Getty Images.
Several buying opportunities
First, investors who are interested in buying Amazon at the new price might not do it immediately. Experience with Amazon shows investors may have several buying opportunities post-split before the shares truly take off. For instance, after the last split -- on Sept. 2, 1999 -- the stock gained. But then it came back down a few times before finally increasing for the rest of the year.
Of course, all post-split performances aren't identical. Amazon shares may take a different path this time around. But history shows us a split doesn't mean we absolutely have to hurry up and buy or miss out on getting in at a good price. So, we shouldn't lose hope about Amazon's long-term performance.
Second, it's important to consider elements that have been weighing on Amazon's earnings -- and therefore on the shares. The stock split doesn't eliminate these challenges. And most long-term investors probably won't buy Amazon just because it completed a stock split. They are looking at the company's earnings and outlook. And right now, some may be concerned.
In Amazon's most recent quarterly earnings report, the company swung to a loss. And free cash flow switched to an outflow of $18.6 billion for the trailing 12 months.
The problem? Like many retailers, Amazon is struggling with higher inflation and supply chain issues. The company is also a bit of a victim of its own success. The massive demand Amazon saw during the pandemic prompted it to double its fulfillment network in less than two years. In the most recent quarter, Amazon spoke of excess capacity due to that investment.
Inflation and the supply chain
Rising inflation and supply chain issues may persist for a while. Those are problems that could continue to hurt Amazon's earnings. The good news is they're temporary. And here's more good news: Amazon is working to better match demand to fulfillment capacity and improve productivity. That should help it control some of its costs. In its earnings call, Amazon said two-thirds of its higher incremental costs were actually within its control.
So while things aren't fabulous for Amazon right now, the long-term outlook remains bright. Still, investors may be waiting to see signs of progress from the company before scooping up shares. If Amazon's struggles continue into the next quarter or quarters, the shares may struggle for a while as well. And that means investors may have plenty of time to buy Amazon shares around the current price.
All of these elements could be holding back Amazon's shares today. And that's why the stock's post-split performance doesn't look much different from its pre-split performance.
Does this mean you should wait instead of buying shares of the e-commerce giant right now? Not necessarily. It's nearly impossible to buy a stock at its very lowest price. And it often doesn't matter. Investors, even at a higher entry point, still may gain quite a bit if they hold for the long term. And that's what I think could happen with Amazon.
