Why It May Be Time for Amazon to Split Its Stock
Updated with Amazon's final closing price.
Shares of online juggernaut Amazon (AMZN) - Get Report closed at an all-time high of $703.07 on Tuesday on news of an analyst increasing his price target for the stock to $1,000 a share, as well as an announcement that Amazon was taking on Alphabet's (GOOGL) - Get Report YouTube with a new user-generated video platform.
As Amazon shares edge ever nearer to four figures, some analysts have suggested a stock split to make its shares more accessible and boost trading liquidity. The company's market cap now stands at more than $330 billion.
The company could implement a 7-for-1 stock split, for instance, that would effectively lower its share price to about $100 without harming the stock's value.
"Its ... share price has reached the point that regular folks who casually like to invest simply cannot afford the stock," wrote analysts at Zacks late last week.
Stock splits can help increase a stock's liquidity by making it attractive to a wider field of investors. The increased volume and interest can themselves lead to gains, and a lower share price also can have a psychological advantage since a $100 stock appears to have more of a chance of doubling to $200 than a $600 stock does of rising to $1,200 -- even though the gain is mathematically identical.
Shares of tech giant Apple (AAPL) - Get Report split 7-for-1 in June 2014 and subsequently rallied as much as 43% to $133 by the following summer before losing almost all of those gains more recently as iPhone sales slowed in the first quarter.
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Meanwhile, shares of streaming service Netflix (NFLX) - Get Report also rallied following its own 7-for-1 split last July, but they are now down 8.6% since then. In Netflix's case the psychology may have been reversed -- an 8.6% slip using its pre-split price to $642.18 may not seem as painful as its current $91.81 share price compared to its $100.37 post-split starting price.
A stock split can increase the chances of a company being added to major stock indexes, which can bolster its price since funds that track those indexes are then forced to buy their stock. Apple's split helped it join the Dow Jones Industrial Average in March 2015, Dow Jones said at the time.
Since the Dow Jones Industrials Average is a price-weighted index, a member company with a high share price distorts its sector's representation on the index. Apple's membership was helped along by another stock split, that of credit card company Visa (V) - Get Report , which lowered the weighting of tech stocks, making way for Apple.
Should Amazon opt for a split, it wouldn't be the first for the Seattle-based internet giant. The company split its shares 2-for-1 in 1998, then 3-to-1 in January 1999 and again 2-for-1 just eight months later. Admittedly, however, those splits came during the dotcom gold rush when technology companies routinely split their shares after seeing prices rise rapidly. Following the last time the e-commerce company had split its shares, it was trading at $119.06.
Amazon didn't immediately respond to a request for comment for this story.
Scott Kessler, head of technology research at S&P Global Market Intelligence, said it's unlikely Amazon or other high-flying consumer and technological shares will split. And that's a good thing.
"It's pretty clear stock splits are not as popular as they used to be," Kessler said in a phone interview.
Amazon hasn't signaled any interest in a split and it's not the only tech company holding steady on this. Alphabet has also sparked a discussion of possibly splitting -- Alphabet was recently trading at around $721 a share, while online travel site Priceline Group (PCLN) was at a lofty $1,263.
"A lot of this originates from, of all things, Berkshire Hathaway (BRK.A) - Get Report (BRK.B) - Get Report," Kessler said, noting that Alphabet executives in particular are students of Warren Buffett and his philosophy of building up businesses over the long term. "They think about owning and running a business and they do it for the long-term. At the end of the day, the high stock prices are a reflection of the focus on the long term."
Berkshire's Class A shares were recently trading at over $216,000, putting them out of reach of many average investors. However, the company did bow to pressure to provide a more affordable and tradable stock and introduced its B shares in 1996 for what was initially 1/30th the price of an A share, though Buffett at the time said he did it to thwart mutual funds threatening to sell fractions of his A stock.
Berkshire subsequently split again 50-for-1 in 2010, bringing the current ratio of A-shares to B-shares to 1500-to-1.
