Amazon ( AMZN 2.42% ) not only pioneered the concept of online retail, but it also has become the undisputed leader in the space. While that alone should be reason enough to own the stock, Amazon has also made a name for itself by popularizing cloud computing as well as establishing a beachhead in the fast-growing area of digital advertising.
Last week, the tech giant stunned investors by announcing a 20-for-1 stock split, the first time Amazon has subdivided its share size this century. As a result, investors who had the stock in their sights are faced with a surprisingly tough decision: Should they buy shares now, or wait until after the stock split?
A look back can sometimes provide context for how to approach the future.
Image source: Getty Images.
A look back at Amazon
It's been many years since Amazon last split its stock. In fact, the most recent division occurred in the previous century, with three stock splits in rapid succession between 1998 and 1999.
The first was a 2-for-1 split announced on April 27, 1998, that finalized on June 1. The second -- a 3-for-1 split -- was revealed on Nov. 19, 1998, and completed on Jan. 4. The most recent was another 2-for-1 stock split, announced on July 21, 1999, and completed Sept. 1. During the 17 months between the first announcement and the final stock split, Amazon share prices surged an incredible 763%, which helps explain the rapid succession of the stock splits.
Is a stock split a good thing? It's complicated...
As I've argued before, a stock split doesn't change the total value of the company splitting its shares. One share of Amazon stock priced at roughly $3,060 has the same economic value as 20 shares priced at $153 (20 x $153 = $3,060). Some would argue, however, that investor psychology has a part to play, resulting in an underlying positive impact. While there's some evidence to support that stance, there are also data to the contrary.
Over the past couple of years, there were a number of high-profile companies that made stock-split decisions that seemed to supercharge price gains in the wake of the announcements. Apple shares jumped 34% in the 30 days following its July 2020 revelation of its 4-for-1 stock split. Tesla made its announcement just weeks after Apple, detailing a 5-for-1 split. From the time of the announcement to the date of the stock split, shares soared 81%.
More recent data, however, seems to contradict that assertion. In conjunction with its fourth-quarter financial report, which was released after the market closed on Feb. 1, Alphabet announced plans for a 20-for-1 stock split. While shares initially spiked on the news, the stock has fallen roughly 3.2% since the announcement. Amazon shares appear to be reacting predictably, with shares currently up about 9.9% since the announcement late last week. Time will tell whether the move holds.
Based on the contradictory data, there's no clear connection between the stock splits and the stock price movements.
Reasons to be bullish on Amazon
There are plenty of reasons to believe that Amazon will shake off the doldrums that have plagued its stock in recent months. Investors are concerned that the e-commerce giant won't be able to keep up the breakneck pace of growth it experienced in the early stages of the pandemic. While that's certainly true, digital retail isn't exactly suffering. E-commerce sales accounted for 13% of total retail sales last year, up from just 4.6% a decade earlier. This suggests that while Amazon's online retail sales growth could slow, e-commerce adoption is ongoing and the opportunity for expansion abounds.
Image source: Getty Images.
While Amazon's e-commerce dominance is undisputed, the company has other growth engines. Amazon Web Services (AWS), the company's cloud computing segment, is the leading provider of cloud services by a wide margin, leveraging the digital transformation to pad its customer base. AWS generated 13% of the company's revenue and 74% of its operating income last year, and that's likely just the beginning. In the realm of digital advertising, Amazon has quietly ascended into the top three, behind just Google and Meta Platforms' Facebook.
Those drivers have fueled solid results for Amazon, even in the face of tough comps. Net sales of $470 billion climbed 22% in 2021, while net income of $33.4 billion jumped 57%.
Finally, Amazon has had an extraordinary run since its last stock split, gaining 4,600% since September 1999. Those notable returns were fueled not only by its e-commerce business but also by its cloud and digital advertising businesses, which didn't even exist at the time of the last stock split (launching in 2006 and 2012, respectively).
While it's unlikely that Amazon stock will generate returns over the next 12 years that are similar to what it did during the past dozen years, we don't know what new profit driver the company could develop that doesn't yet exist. Time will tell.
The fine print
If you're bullish on Amazon, there's no reason to wait to buy shares. That is, of course, unless your personal financial situation makes it difficult to spend roughly $3,000 per share and your brokerage doesn't offer fractional shares. If that's the case, the upcoming stock split will provide the opportunity you've been waiting for.
If you buy Amazon shares now (or already own them), be prepared for the additional record-keeping that comes with a stock split. For example, you'll need to modify your purchase records to adjust your cost basis, taking the initial share price at the time you bought the stock, and dividing by 20 to account for the newly issued shares (for example, $3,060 divided by 20 shares = $153). While it doesn't matter now, it becomes important later when you sell your shares and are required to pay any resulting taxes on the capital gains. Most brokerages handle this behind the scenes, however, so it should be relatively simple.
Given Amazon's dominant position in both e-commerce and cloud computing, the company's relentless execution, and its ongoing opportunities, it really doesn't matter if you buy the stock now or wait until split-adjusted trading begins on June 6. Just as long as you own it.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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