But the split shouldn't really affect Amazon's valuation. Basically, it's just cutting the same pizza into more slices.
However, the market takes more into consideration than a company's fair value.
The Amazon Maven has already discussed three reasons why we believe the split has awakened the AMZN bulls. Today, let's look at what the top Wall Street firms are saying.
(Read more from Amazon Maven: Amazon Stock: What Is Behind The Big MGM Deal)
It's a Shareholder-Friendly Move
Morgan Stanley’s Brian Nowak has released a bullish note stating the stock split and buyback plan “are now one part of a series of increasingly shareholder-friendly actions.” The analyst believes the split will make the stock more appealing to retail investors, allowing it to “better compete for investor capital.”
But if a stock-split doesn’t mean value creation, why should retail investors buy Amazon stock now? The answer, for Nowak, lies in the company’s historical performance. “Historically, AMZN's repurchases have been positive signals about the equity value,” said the analyst, “as they would have earned an average return of 42% over a six-month return period.”
Therefore, for an investor who bought and held the stock over 12- and 24-month periods, Amazon's share repurchases would have generated returns of 100% and 135%, respectively, calculated Nasdaq author Marty Shtrubel. That ultimately shows Amazon’s repurchases have been very well-timed.
The Timing Is Great
Wells Fargo’s Brian Fitzgerald believes the stock repurchase has come just at the right moment, because it signals Amazon may start to increase its focus on profitability after a long period of investing in its infrastructure.
“Following a significant capital-investment cycle to support a rapid expansion of e-commerce volumes during the COVID-19 pandemic and to support the rollout of one-day and same-day Prime shipping options, we believe that investment intensity is now downshifting to a more sustainable pace,” Fitzgerald wrote.
The Bank of America endorses those bullish expectations: BofA Global Research calculated that companies that announced a stock split saw their shares perform an average of 25% better a year later, when the overall market rose only 9%. For discretionary, health, and tech companies, those numbers were even better, ranging from 26% to 38%.
Is the Rally Coming?
For the past few months, Amazon stock has been struggling to build momentum. It was expected the company would eventually overcome the Street’s expectations before a new rally started. But maybe the stock split will prove to be the catalyst Amazon bulls have been patiently waiting for.
Because the split doesn’t change the company’s fair value, analysts have kept their target prices: Morgan Stanley’s Brian Nowak at $4,200, Wells Fargo’s Brian Fitzgerald at $4,250, and BofA’s Justin Post at $4,450, reiterating AMZN as his favorite MANGA stock for 2022.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)