Amazon (AMZN) stock closed at $2,447 per share on June 3, 2022. On June 6, 2022, it closed at $124.79 per share. But don’t worry — the e-commerce juggernaut didn’t lose 95% of its value over the weekend. Amazon declared a 20-for-1 stock split, effective June 6, 2022. Does this mean it’s time to buy?
What Is a Stock Split?
A stock split occurs when a company decides that its stock has become too expensive and wants to lower the price. In order to have a lower stock price but maintain the company’s valuation, they split the stock. Each share of stock is split into multiple shares, but the overall value of the total number of shares — the market capitalization — remains the same. So the price per share before the split is divided by the number of shares in the split.
Here’s an example. Company ABC’s shares are trading at $500 per share. A shareholder who owns 100 shares of ABC stock has an investment worth $50,000. The company declares a 2-for-1 stock split. Now that same shareholder owns 200 shares of ABC, but each share is worth $250. The shareholder’s total position is still worth $50,000.
In many cases, a company will split a stock 2-for-1 or 3-for-1. In a 2-for-1 split, a share of stock worth $100 will be split into two shares worth $50 each. Each shareholder would have double the number of shares, each worth half the price of a pre-split share. A 20-for-1 stock split, as Amazon has done, is rare.
Why Do Companies Split Their Stock?
In a perfect world, a company’s stock will rise over time. It won’t gain value every day, of course, and there will be times when it goes down, but the overall trajectory is upward. Some companies’ stocks rise faster than others and some tech stocks have risen very quickly in a short period of time. The result of this, in addition to some very happy shareholders, is that the stock gets pretty expensive.
A company may feel that its stock is not viewed as affordable for the average investor if the price gets too high. So they split the stock, which lowers the price and — hopefully — attracts more investors, who then drive up the price.
This is not the first time Amazon has split its stock. On June 2, 1998, Amazon had a 2-for-1 split. Not long after that first split, on January 5, 1999, the company split the stock again, this time 3-for-1. Then on September 2, 1999, the company split the stock again, this time 2-for-1. The stock did not split again for almost 23 years, until the 20-for-1 split on June 6, 2022.
Stock splits are common, particularly among tech stocks. Apple (APPL) stock has split five times since the company went public in 1980. Apple split 2-for-1 on June 16, 1987, 2-for-1 on June 21, 2000, 2-for-1 on February 28, 2005, 7-for-1 on June 9, 2014, and 4-for-1 on August 28, 2020.
Some companies never split their stock. Perhaps the best-known example of this is Warren Buffet’s company, Berkshire Hathaway, whose class A shares traded, as of June 6, 2022, at $468,400. This demonstrates the reasoning behind the stock split, as a single share of this stock is priced out of reach for many individual investors. Berkshire Hathaway also has Class B shares which are a little more affordable, trading on June 6, 2022, at $312.15.
A company may also choose to do a reverse stock split, where the number of shares is reduced, causing the share price to go up. In this case, a shareholder might have 100 shares of XYZ Company, valued at $5 per share. If XYZ Company declares a 1-for-2 reverse split, the shareholder would end up with 50 shares, worth $10 per share.
Is This a Good Time To Buy Amazon Stock?
A stock split, in and of itself, does not change the value of the company, since the market capitalization — price per share times number of shares outstanding — remains the same before and after the split. But a split is often a sign that the company is doing well since the stock has risen to the point where a split makes sense.
Even though the split doesn’t necessarily indicate you should run out and buy Amazon, its prospects still look good. Of the 58 analysts who follow Amazon stock, none of them rated it a “Sell” in May. One rated it an “Underperform” and one rated it a “Hold.” But 36 analysts rated it a “Buy” and 20 rated it a “Strong Buy.” That gives the stock a recommendation rating of 1.7 out of 5, where 1 is a “Strong Buy” and 5 is a “Sell.”
Another benchmark for whether a stock is a good buy is the price/earnings ratio. Amazon’s P/E ratio is currently 59.85, considerably higher than comparable companies like Apple (APPL) at 23.81, Meta (FB) at 14.70 and Alphabet (GOOGL) at 21.13. This high P/E ratio would indicate that these other tech stocks are more of a bargain than Amazon, but the P/E ratio alone doesn’t tell the whole story. Amazon’s P/E ratio right now has been fairly consistent for several years and the stock price has continued to climb.
Whether Amazon is a good stock to buy depends upon your investment objectives and how the fits with the rest of your portfolio. The stock split doesn’t change that and the stock is not a better — or worse — choice because of the split.
Information is accurate as of June 6, 2022.