There's been much talk and excitement following news of Amazon's (AMZN -1.07%) 20-for-1 stock split, but how does this change the landscape for those considering an Amazon investment? The truth is, despite the recent rally in Amazon shares, the stock split has no impact at all on the fundamentals of Amazon.
Why would Amazon split?
Companies often conduct a stock split to make their shares more affordable for smaller investors. With Amazon shares hovering around $2,500, a split makes sense in that context. A 20-for-1 split means shares valued at $2,447.00 at the close pre-split will be worth $122.35 afterward.
However, that doesn't change the underlying value of the company. Because every investor will receive 19 additional shares for each one they already own, the market capitalization of Amazon will remain precisely the same.
Will Amazon's split lead to gains?
History shows us that after a stock split, shares tend to outperform the broader market -- both in the short term and over the next 12-month period. A study by Bank of America shows that since 1980, shares of stocks that split are up 25% 12 months later, compared with a 9% increase for the broader market over the same time frame. Gains are not guaranteed, however, with 30% of stocks trading lower 12 months after a split.
There are two reasons for stocks to outperform after a split. First, investors often take the stock split as a sign of confidence from management. That's not necessarily the case for Amazon in the current scenario. Management has said that costs will remain elevated, and challenges around logistics remain. Second, stock splits increase liquidity -- how easy it is for investors to buy or sell shares. Amazon acknowledged this could be a factor when it announced the split.
The lower price point makes it easier for small investors to buy shares, which could contribute to a rising stock price. But remember that Amazon will have the same revenue and earnings per share post-split and the same market capitalization. Plus, the split could allow some investors to sell a part of their holdings. If an investor had 10 Amazon shares pre-split and 200 afterward, they could more easily sell some of those shares to rebalance their portfolio.
Amazon's current performance and future opportunities
Amazon's stock hasn't performed particularly well since announcing the split on March 9, 2022. Between then and the actual split on June 3, 2022, shares fell nearly 17%.
If you're considering an investment in Amazon, you may want to look even longer-term, where Amazon still makes a compelling case, despite its current struggles with inflation, staffing, and shifting consumer behavior. For example, in 2021, revenue grew 22% year over year, and net earnings rose 57%. That's very impressive for a company with annual revenue of $470 billion and a market cap of $1.245 trillion.
If you believe e-commerce, cloud computing, and online advertising will continue growing at an impressive pace, then Amazon is a good way to take advantage of all three trends. That's particularly true as Amazon is considered a leader in all three categories.
It's projected that the cloud computing market alone will grow to $1.5 trillion by 2030. Amazon's AWS service is the leading provider of cloud computing, with a 33% market share in the fourth quarter of 2021. Maintaining that market share would yield $495 billion in 2030 revenue, more than Amazon's current total annual revenue.
Amazon's e-commerce grip is even stronger. In 2021, Amazon had a 56.7% U.S. market share. That's up from 53.1% in 2020 and 39.7% in 2016. With U.S. e-commerce sales projected to grow from $767.7 billion in 2021 to $1.33 trillion in 2025, it's clear Amazon could easily continue growing its revenues and earnings at a strong clip.
Should you buy Amazon shares now?
At the end of the day, base your decision to buy newly split Amazon shares or not on your own investing goals. It can be tempting to buy a usually expensive stock when it sinks, but it's important to remember that the lower price doesn't mean you're getting a better deal. Still, if you were interested in buying Amazon before the split, then investing after the split is still a good plan since shares are more accessible.
