Amazon.com (NASDAQ: AMZN) shares are currently trading at their lowest level since July 2020. But the Amazon share price rose by 7% in after-hours trading on Wednesday, after the online giant announced a stock split.
I expect the split to reduce Amazon’s share price from over $2,900 to around $150. But will it make the shares rise — and would I buy Amazon today?
Why do a stock split?
A stock split is when a company increases the number of shares in issue in order to reduce their price. Amazon is planning a 20-for-1 split. This will mean that for each existing share, shareholders will (automatically) receive 19 new shares. The price of each share will fall so that the total value of each shareholder’s stake is unchanged.
Amazon’s stock split decision follows recent splits by Tesla, Google-owner Alphabet and Apple. The main advantage of these splits is that it will become easier for investors to deal in smaller numbers of shares.
For example, buying $1,000 of Amazon stock is currently only possible with brokers that allow fractional share trades. Not all do.
Buy the split?
Historically, company share prices often rise after a stock split. But there’s rarely any logical reason for this. Splitting a stock doesn’t have any impact on profits or future performance. Earnings per share will be adjusted in line with the stock split, so the price/earnings ratio will remain the same too.
As far as I can see, stock splits tend to drive share price gains for two reasons. One is that a share with a lower price feels cheaper, even though it isn’t. This may encourage more smaller investors to get involved. However, with a stock as large and heavily traded as Amazon, I can’t see this having much impact on the share price.
The other possible reason I can see is that when a company decides to split its stock, it’s reminding everyone how much its shares have risen. Investors may pay fresh attention, hoping that the growth will continue.
Amazon’s share price is down by 5% on a year ago but has risen by nearly 250% over the last five years. Perhaps management are trying to reverse the recent slide.
Will Amazon’s share price rise?
Amazon’s sales rose by 22% to $470bn last year, lifting the group’s operating profit by 9% to $24.9bn. According to CEO Andy Jassy, the retail business has remained “in peak mode” since the start of the pandemic, while Amazon’s AWS cloud hosting service reported a 40% rise in revenue last year.
Although these numbers are impressive, 2021 wasn’t a perfect year. A sharp rise in costs meant the company saw cash outflows of $20bn, after financing costs.
2022 is expected to be a tough year, with profits falling below the exceptional levels seen in 2021. As a result, Amazon shares trade on a pricey 57 times 2022 forecast earnings. However, analysts expect to see a strong return to growth in 2023.
Although the short term is uncertain, I think the Amazon share price is likely to continue rising over the long term. As such, I would consider the shares for my portfolio.
