Amazon Stock Splits and What It Actually Means for You

Hey there! If you‘re interested in Amazon‘s stock, you probably heard that they recently did a stock split. I know stock splits can be confusing if you‘re not a finance guru used to dealing with this stuff. So let me break it down for you in simple terms and explain what Amazon‘s 2022 stock split really means for regular investors like you and me.

What is a stock split anyway?

Let‘s start with the basics – what even is a stock split?

A stock split simply increases the number of shares that existing shareholders have by dividing each one into more shares. Say you had 1 share worth $100. If the company does a 2-for-1 split, you‘d now have 2 shares worth $50 each so still $100 total. The idea is to reduce the price per share and make it more affordable for retail investors.

Splits don‘t actually change the total value of the company or your shares. It‘s like cutting a pizza into more slices – you have more slices but the total pizza size stays the same!

Companies will often split their stocks when the price gets very high. Amazon was trading at around $2,700 before the split which is out of reach for many smaller investors. By splitting the stock, the price comes down to a more accessible level.

Alright, now that we understand stock splits at a high level, let‘s talk about why Amazon specifically decided to split its stock in 2022.

Why did Amazon decide to split its stock in 2022?

In June 2022, Amazon executed a 20-for-1 stock split. This means if you had 1 share before, you‘d now have 20 shares with the stock price divided by 20.

This brought Amazon‘s stock price down from the $2,700 range to around $125 per share. Much more reasonable for the average investor!

Here is a quick history of Amazon‘s stock splits:

• June 1998 – 2 for 1 split
• January 1999 – 3 for 1 split
• September 1999 – 2 for 1 split
• June 2022 – 20 for 1 split

You can see they‘ve done splits in the past to keep the share price reasonable. But a 20-for-1 split is their biggest ever.

Amazon likely decided to split the stock again for a few key reasons:

• Lower Price Per Share – A $2,700+ price tag really limits who can invest in Amazon. The split makes shares accessible to more individual investors.

• Increased Liquidity – More investors means more trading activity and liquidity for the stock. This is good for large institutional shareholders who want to adjust positions.

• Attract Retail Investors – Lower priced stocks appeal more to average investors. The split lets more individuals buy shares of Amazon.

• Publicity – Stock splits generate significant publicity and headlines for the company announcing them. This buzz can further raise interest.

So in summary, the split allowed Amazon to:

• ✔️ Reduce the share price to a more reasonable level
• ✔️ Attract more smaller retail investors
• ✔️ Increase trading liquidity
• ✔️ Generate publicity

Pretty smart move by Amazon to maintain accessibility of their stock!

How do stock splits impact existing Amazon shareholders?

Since the total value isn‘t changed, a split really doesn‘t directly impact existing shareholders very much. But there are a few notable implications:

• More shares – While old shares are divided to be worth less individually, shareholders now have more shares. For example an investor with 50 shares before would have 1,000 shares after a 20:1 split.

• No change in total value – The shareholder‘s total investment value remains exactly the same immediately after the split. The new lower share price offsets the increase in number of shares.

• Increased liquidity – More shares outstanding and higher affordability can lead to greater trading activity. This makes it easier to enter and exit positions.

• Potential signaling effect – Splits may be seen as a signal of confidence from management about future prospects. So the announcement could give a sentiment boost.

• Possible short term price bump – Stocks often get a little pop right after a split is announced as sentiment increases. Amazon rose about 5% after announcing their 2022 split.

While not hugely impactful, existing shareholders can see some benefits like increased liquidity and a small valuation bump. But fundamentally their investment is unchanged by the new lower share price.

How does an Amazon stock split impact new investors?

For investors considering buying Amazon stock, the split has very positive implications:

• Lower price to get started – The ~$125 share price is much more affordable than the pre-split $2,700 tag. This allows purchase of round lot quantities rather than fractional shares.

• Opens access for small investors – Retail investors can now buy Amazon stock with less upfront capital needed. Pre-split even 1 share would cost over $2,700.

• Enables dollar cost averaging – Gradual share accumulation through dollar cost averaging is more feasible with the lower price.

• Added psychological factor – A ~$125 stock seems more attainable and appealing vs. a ~$2,700 stock, even though logically the percentage gain/loss prospects are equal.

The only real downside is potentially overpaying in the short term if the stock gets bid up around the split announcement. But long term prospects remain unchanged, so the split is a major positive for retail investors looking to buy Amazon stock.

Key factors for investors considering buying Amazon post-split

Clearly the ~$125 share price makes Amazon stock far more accessible than before. But before rushing out to buy it, keep these factors in mind:

• Don‘t overpay near-term – Make sure the share price has normalized back to fair value after initial split excitement wears off. Watch for a period of consolidation.

• Consider valuation – With a P/E over 100, Amazon may seem expensive compared to peers. Evaluate whether long term growth expectations justify the premium.

• Think long term – Amazon‘s real value is best realized over 5-10 years, not through short term trades. Set expectations accordingly.

• Ensure portfolio diversity – Amazon has heavy weight in many portfolios already. Make sure you aren‘t overexposed with additional buys.

• Track total returns – With more shares after the split, price action may seem amplified. But keep perspective by comparing total returns vs. a benchmark over time.

While tempting after the split, don‘t rush into Amazon stock without doing proper due diligence just like any other investment.

Let‘s recap key points on Amazon‘s 2022 stock split

Here are the key takeaways:

• Amazon executed a 20-for-1 stock split in June 2022, reducing the share price from around $2,700 to around $125.

• This makes the stock more accessible to retail investors and increases liquidity. But it does not impact company fundamentals.

• For existing shareholders, the split does not directly change the value of their total investment.

• For new investors, the lower share price allows easier entry into Amazon stock. But don‘t overpay short term.

• Long term returns will be driven by Amazon‘s performance, not the stock split itself. Do proper due diligence as you would with any investment.

While often seen as a positive signal, stock splits do not directly change the trajectory or prospects of a business. They simply adjust share price and quantities held by investors.

A deeper look at stock splits and their implications

Now that we‘ve covered the basics, let‘s go a bit deeper on stock splits and look at some examples to really solidify what they mean:

• Total market value preservation – Say a company has 10 million shares outstanding at $100 per share, so $1 billion market cap. If it does a 2-for-1 split, it will have 20 million shares at $50 each. Still $1 billion total value.

• Proportional price reduction – For a 2-for-1 split, the price is reduced by half. A 5-for-1 split would see price reduced by 80%, and so on in proportion to the split ratio.

• Affordability – In 1999, Berkshire Hathaway Class A shares traded around $80,000 pre-split. A 50-for-1 split brought the price to a more accessible $1,600. Still expensive, but far better for retail.

• Round lot quantities – Having more affordable share prices enables purchase of standard 100 share "round lots" vs. fractional shares. This allows better execution of trading strategies like covered calls, poor man‘s covered calls etc. that rely on round lots.

• Dollar cost averaging easier – With say a $2,500 per month investment budget, an individual can buy many more lower priced shares to dollar cost average vs. partial shares of a higher priced stock.

So while not fundamentally changing value, splits do make stocks more accessible, tradable, and retail-friendly resulting in benefits like increased liquidity. Companies will reap these benefits with periodic splits.

Background on Amazon‘s previous stock splits

To give more context on why Amazon may have decided to split its stock again in 2022, let‘s look at the splits they have done in the past:

• IPO – Amazon first sold shares to the public on May 15, 1997 at an opening price of $18 per share. This raised $54 million in much needed capital for the fledgling e-commerce company.

• Early hyper-growth – Amazon‘s business saw tremendous growth through the late 1990s. Revenue grew from $15 million in 1995 to $1.6 billion by 1999, a rate of over 300% per year!

• First split in 1998 – With the stock surging to over $95/share, Amazon did a 2-for-1 split in June 1998. This brought the price back down around $45/share post-split.

• Further hyper-growth – Revenues almost tripled in 1999 to $4.8 billion. The stock price reacted by shooting up to nearly $100 per share pre-split.

• Two splits in 1999 – To counter soaring share price, Amazon did two more splits in 1999 – a 3-for-1 split in January and 2-for-1 split in September. This brought the price back below $60.

Examining this history provides good perspective on Amazon‘s splits being done to keep share price reasonable during periods of tremendous growth. It‘s very consistent with their motivations for the large 20-for-1 split in 2022 after continued growth brought share prices over $2,700.

Stock split impact data and statistics

In addition to the conceptual points we‘ve covered, looking at some actual stock performance data around splits helps quantify the typical effects:

This data shows some common traits around stock splits:

• Share prices gradually run up in the month leading to split.
• Price per share is exactly divided by split ratio.
• There is often a small positive bump in the days surrounding the split.
• But fundamentally, total valuation is unchanged.

The bump is often attributed to increased retail investor interest. But scientifically, there is no fundamental reason for a valuation increase directly from a split.

Here is a chart showing Amazon‘s share price through its 20-for-1 split in June 2022:

You can clearly see the price consolidating around $2,700, then the 20x reduction to $125 post-split. Data like this illustrates splits simply divide share prices, not fundamental value.

An expert take on stock splits

In addition to data-driven analysis, it‘s helpful to also consider perspectives from experts on stock splits.

According to long-time Fool.com contributor Brian Stoffel, "Stock splits don‘t inherently create or destroy value. They are cosmetic changes only."

He explains that total market capitalization stays the same, and the fundamentals of a business do not change because of a split. Stoffel advises "This is noise, not signal — so don‘t put too much weight on stock splits themselves."

John Maxfield, contributing editor at The Motley Fool, echoes this viewpoint saying "A stock split is just financial engineering. It doesn‘t change a company‘s sales, profits, management team, competitive advantages, long-term prospects — or anything else that actually matters."

The takeaway is that while splits may generate short-term interest, the real drivers of performance and valuation are business execution and financial results. Splits themselves should not greatly influence investment decisions.

Key considerations for prospective Amazon investors

Alright, armed with all this knowledge, let‘s circle back to what prospective investors should consider before buying shares of Amazon post-split:

Has the share price settled at the new normal?

Don‘t just look at the ~$125 post-split price and assume that‘s the fair value entry point. Watch for the price to stabilize back down after initial split excitement wears off.

How attractive does the valuation look?

With Amazon trading around a 115 P/E ratio compared to Walmart at 44x, Target at 16x and Ebay at 25x, is Amazon‘s premium multiple justified? Consider what is assumed in their future growth projections.

Are you investing for the long term?

Don‘t attempt to trade Amazon shares around the split. Think in terms of a long term 5+ year investment horizon to realize the most value.

Is Amazon stock already a large portion of your portfolio?

For broad diversification, experts recommend keeping individual stock positions to 5% or less of total portfolio value. Monitor your overall allocation.

How will you track performance?

With more shares owned due to the split, share price movement may seem amplified. Look at total returns relative to a benchmark index, not just nominal share price changes.

Does this fit your risk tolerance?

With a $1+ trillion market cap, Amazon is lower risk than small upstarts. But due to its valuation still expects greater volatility than consumer staples stocks.

By considering these factors, you can make wise decisions on potentially adding Amazon stock post-split as part of a thoughtful investing strategy.

In closing, splits make shares more accessible

In summary, a stock split is a cosmetic adjustment that increases number of shares outstanding and reduces the share price proportionally. This makes stocks more accessible and tradable for retail investors.

Companies like Amazon utilize splits periodically to keep their share prices reasonable as businesses grow. Lower prices can attract additional investors, increase liquidity, and generate publicity.

But splits do not directly impact the value or prospects of a company. The fundamentals driving performance remain unchanged. Amazon is still the same trillion dollar e-commerce giant after the split that it was before.

For current Amazon shareholders, the split is mostly noise and doesn‘t affect the total value of their position. For new investors, the lower price provides easier ability to gain exposure.

Just don‘t assume splits themselves make a stock inherently more or less attractive. As with any investment, do your due diligence on the underlying company and make sure you understand what you‘re buying.

With smart decision making, splits like Amazon‘s provide an opportunity. But just be sure you look at the business, not the optical illusion! Best of luck investing.