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3 Reasons Why the Amazon Split Could Send Shares Higher

Amazon has just announced it is going to split its stock in a 20-for-1 deal. Here are three reasons why this could cause AMZN stock price to go up.

Amazon’s  (AMZN) - Get Inc. Report board of directors announced a 20-for-1 stock split on March 9. The company’s management has also authorized a share buyback worth up to $10 billion.

In theory, a stock split shouldn’t change the company’s market capitalization value — just like how cutting a pizza into more slices doesn’t make it bigger. However, Amazon stock price was up nearly 7% after the announcement. Here are three reasons that might explain this “mini-rally.”

Figure 1: 3 Reasons Why the Amazon Split Could Send Shares Higher

Figure 1: 3 Reasons Why the Amazon Split Could Send Shares Higher

(Read more from Amazon Maven: Want to Buy Metaverse Stocks? How About Some AMZN?)

An Irrational Bullishness

Stock splits have the history of driving prices up: In August 2020, Apple  (AAPL) - Get Apple Inc. Report and Tesla  (TSLA) - Get Tesla Inc. Report split their stocks in 4-for-1 and 5-for-1 deals, respectively. Some could argue this is caused by the market's new entrants, who couldn’t access those companies’ shares before the split. However, that’s hardly the case, since investors are able to purchase fractional shares of those companies.

Because the actual value of the company hasn’t changed, we can blame the market's irrationality for this bullishness. At the end of the day, stock prices are determined by supply and demand. Therefore, a company’s market capitalization goes up if people are willing to pay higher prices per share, and the reason might not always lie in the company's fundamentals, but purely in shareholder sentiment.

ETF-Pushed Demand

The Dow Jones index is different from the S&P 500 index or the tech-rich Nasdaq Composite: The Dow is weighted by share price, not by market capitalization. This means, at its current price, Amazon can’t be included in the DJIA without distorting the index.

However, after the split, a single AMZN share will go from about $2,800 to $140. This means Amazon stock might finally get included in the DJIA. In this scenario, ETF investors might create more demand for the stock, ultimately pushing prices up.

A Small Incentive

Management’s up-to-$10 billion buyback represents an irrelevant amount for Amazon’s total market cap of $1.4 trillion. Even if the buyback does reach the $10 billion amount, it would hardly raise demand enough to create a significant price hike.

But that could happen indirectly. A stock buyback from directors is a way to encourage management’s thirst for generating better-than-expected results. The market’s perception for this incentive policy could be positive enough to create a (possibly small) rally — especially in times when growth expectations look so uncertain.

(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)