Amazon’s Stock Split: The Real Reason It Matters


In most cases, stock splits don’t really matter. Whether you divide your company ownership into 10 million shares or 100 million shares, the total market value remains the same. Each slice is 10 times larger than the other in a serving model.

So when I see one of my favorite companies announce and execute a stock split, I want to jump ahead. I have podcasts to devour and a weak guitar to abuse.

But there are times when a stock split makes me sit up and take notice. the amazon (AMZN 3.81%) It sparked that backlash in March of last year, when it scheduled a 20-for-1 stock split in early June. To me, that was actually a big deal — but probably not because of Amazon’s management intentions.

Stock splits are market psychology 101

Many smarter investors than me have described the stock market as an exercise in mass psychology. For example, Nobel-winning economist Robert Shiller used that exact term in 2017 to describe the overheated cryptocurrency bubble that year, extending it to a similar stock market boom.

And the same group mentality that divides stocks plays. A much-cited research study by Kadapakkam et. al, entitled “Stock Splits, Broker Promotion, and Decimalization,” suggests that stock brokers rely on low share prices following stock splits to induce heavy trading by small investors. In reality: “Everyone else is jumping into this trade, so why shouldn’t I?”

Those trading volume bumps and share price gains tend to be short-lived, as investors move on to the next piece of seemingly game-changing news. Amazon’s split was no different. Shares rose nearly 10% in the two weeks before the split, with slightly higher trading volume. Both effects are gone after five market days. It was business as usual, with no surprises.

A cosmetic change or vote of confidence?

However, short-term market action can be deceptive.

When Amazon unveiled its first stock split since 1999, it was more than a cosmetic change. Shares were priced at around $2,800 at the time, putting them out of reach for some investors with limited budgets.

It’s true that most investors can buy fractional shares these days, allowing one-twentieth of an Amazon share before the split to be effectively the same as a full share after the accounting is removed, but a handful of popular stock exchanges still don’t offer it. Others may charge a fee to take advantage of fractional shares.

Moreover, most exchanges with this convenient feature do not promote it much. It depends on our investors that we don’t always have to splurge for a whole share.

So this stock split was actually helpful for investors who do not trade fractional shares for one reason or the other. Making it easy to buy and sell your stock is a huge vote of confidence in the company’s future. That’s huge because Amazon’s board of directors, led by founder and executive chairman Jeff Bezos, has so long refused to lower the door to stock ownership. The company split its shares three times between the skyrocketing prices of the dot-com bubble in 1998 and 1999, followed by a sharp plunge when that bubble popped.

I can understand if that experience left a bad taste in the mouths of Amazon’s accounting team and leadership — no one likes to make an ambitious bullish bet and then run into a brick wall. On the same note, abandoning that cautious policy after two decades and changing it showed a lot of confidence in the next few years.

A long-term perspective on economic challenges

Of course, the stock market was just beginning to think about rising inflation and interest rates designed to combat that problem. When the real split happened in June, S&P 500 It’s down 13.5% year to date, and Amazon’s stock is down 25% — including the temporary 10% boost that the split itself triggered.

Did Amazon’s leaders miss the inflation-driven signs of an impending bear market, or even recession? Maybe so, but a bullish analysis of long-term trends doesn’t change the value I see.

The economy moves in cycles, and you know the dance — upswing, then downswing, circle back, and doo-see-doo. Government efforts to regulate the process sometimes increase the size of subsequent rounds, with ripple effects for years to come. The economic mess we’re in now can in many ways be traced back to the early days of COVID-19, and the other issues we’re still dealing with started even earlier.

Another wave of inflation crisis. In the long run, everything adds up. The economy will get back on its feet, prompting Amazon’s customers to place more orders, causing the stock price to rise again. Investing is a marathon, not a sprint, and Amazon’s stock split is solid evidence that the company is taking a long-term view even in the face of current and upcoming challenges.

That’s a good and healthy management attitude, in my book.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Anders Bylund has positions at The Motley Fool features and recommends Motley Fool has a revealing policy.


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