On June 6, Amazon (AMZN) - Get Amazon.com Inc. Report completed a 20-for-1 stock split. Despite not adding any real value to the company, stock splits are known for spiking share prices — as happened with Apple (AAPL) - Get Apple Inc. Report and Tesla (TSLA) - Get Tesla Inc. Report.
However, Amazon's split didn’t have the same effect.
In a recent article, Motley Fool author Keith Speights discussed how much of Amazon's recent rally was assisted by the split. Today, the Amazon Maven gives its take on Speights' perspective: Is the effect of the stock split still to come?
(Read more from the Amazon Maven: Amazon After Q2 Earnings: What the Analysts Are Saying)
How the Split Could Have Sent the Stock Higher
A stock split is nothing more than dividing the number of outstanding shares by a predetermined factor. It's like swapping one $20 bill for 20 $1 bills.
Therefore, there's no real reason why a company's valuation should increase.
However, in Amazon's case, we were led to believe that a split would help the stock gain traction. There are three main reasons for that:
- Shares become more affordable: As the price got 20 times lower, retail investors could find it easier to purchase whole AMZN shares (instead of buying fractional shares), which would elevate Amazon's stock price.
- ETF-led demand: The lower stock price could lead to AMZN's inclusion in the Dow Jones industrial average (DJIA) and increase the demand for the stock among exchange-traded funds (ETFs).
- A $10-billion share buyback: Wells Fargo’s Brian Fitzgerald interpreted Amazon’s increased share repurchase authorization as “further evidence of a sharper focus on profitability.”
The Motley Fool’s Take
According to Speights, demand from retail investors is the key to a successful stock split.
However, the timing for Amazon’s stock split wasn't great. The company's gloomy first-quarter results were still keeping retail investors from buying shares.
But the Motley Fool contributor believes Amazon's stellar second-quarter earnings — which were announced in July — plus the announcement of a new Prime Day sales record and the news of One Medical (ONEM) - Get 1Life Healthcare Inc. Report and iRobot (IRBT) - Get iRobot Corporation Report acquisition plans could be the incentive retail investors needed.
Therefore, Speights thinks that some of Amazon's recent stock rally could still have been driven by the split.
Is it likely Amazon's split helped increase demand for its stock?
How significantly did it do so?
As Speights highlighted, it's impossible to answer this question.
However, I don’t believe the split played a significant role in Amazon's recent rally.
Traditionally, Amazon shares have responded well whenever the company has made an announcement about its growth. I think the rally has more to do with the company's second-quarter results than with the split.
I believe the Amazon stock split will have more of an impact if the company actually gets included in the DJIA.
However, this process is arbitrary — a committee made up of index representatives and Wall Street Journal editor decides which stocks can join the DJIA. Therefore, investors shouldn’t base their investment thesis solely on this possibility.
(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)