Amazon (AMZN 1.30%) recently completed a much-talked-about stock split. Why was it such a big deal? Because Amazon's last such split was more than 20 years ago. As Amazon shares soared -- eventually reaching more than $3,000 in recent times -- investors speculated about a potential split. So when the company finally announced the move, it grabbed everyone's attention.
A stock split doesn't change anything fundamental. The company issues new shares to current holders, bringing down the price of each share accordingly -- and the market value of the company remains the same. Does that mean we can call the recent stock split a "nonevent" for Amazon? Not necessarily. Let's take a look at why Amazon's stock split really does matter.
A 20-for-1 split
Amazon announced a 20-for-1 split in mid-March. That means investors holding one Amazon share received 19 additional shares. At a pre-split price of about $2,000, the operation brought Amazon stock down to about $124.
Hopes were high that this move would spur investors to flock to the shares at a lower price point in the days following the split. But Amazon's post-split performance hasn't been too bright. The stock has slipped about about 20%.
It's not surprising that Amazon's stock hasn't taken off. Higher inflation weighed on the e-commerce giant's earnings in the first quarter. And management said that challenge may last longer than the company expected earlier in the year.
At the same time, higher inflation has plagued companies and consumers worldwide -- and interest rates are on the rise to tame it. Rising inflation results in rising costs for Amazon. And it hurts the wallets of consumers -- meaning they may buy fewer nonessential items on Amazon. As for interest rates, they weigh on consumers' wallets too. All this means that today's environment isn't the best for retailers.
Knowing that, some investors aren't rushing out to buy Amazon shares. They may want to wait and see how Amazon handles its costs in the next earnings period. Amazon said during its last report that it's focusing on costs that it can control, such as those linked to productivity and its fulfillment network.
The long-term impact
So that's Amazon's current situation. And as such, the stock split may not matter much. But over the long term, the stock split does matter. As mentioned, thanks to the split, Amazon shares now are trading at a lower price. That helps opens the door up potentially to a broader range of investors.
Prior to the split, investors who didn't have thousands of dollars to invest in just one stock -- or didn't want to invest that much -- could rely on fractional shares. But some brokerages don't offer that opportunity. And some investors prefer buying at least one full share or more. For all of these investors, it's a lot easier to buy shares of Amazon post-split. And this one element could help Amazon's shares eventually pick up speed.
It's also important to remember that Amazon's revenue and profit growth and its ability to manage today's tough times matter even more than the split. If a company splits the stock but keeps reporting terrible earnings quarter after quarter, the stock split won't offer a lift -- in the near term or the long term.
But when it comes to Amazon, I'm confident about long-term growth. The company's cloud computing business continues to increase sales and operating income in the double digits. And Amazon's Prime membership program should drive e-commerce growth once inflationary pressures ease. All of this means another wave of gains may be in Amazon's future.
