Amazon Stock: Why Is It Splitting And What It Means For Retail Investors And Option Traders

Amazon Stock: Why Is It Splitting And What It Means For Retail Investors And Option Traders

dima_zel/iStock via Getty Images Investment Thesis

Amazon.com ( AMZN ) announced its plan for a 20-for-1 stock split on 9th March 2022, sending its stock price up by 9.9% after hours. In addition, the company announced a $10B share buyback plan that replaces its previous $5B authorization in 2016, of which $2.12B had been exercised.

The stock split trend has been recently observed amongst high-value stocks, such as Alphabet ( GOOG ), NVIDIA ( NVDA ), Tesla (NASDAQ: TSLA ), and Apple (NASDAQ: AAPL ). Despite the theoretical approach that a share is simply divided into multiple shares with correspondingly lower values, we beg to differ. Smaller, individual investors would be better incentivized to buy a company’s stock once its share price is lowered, thereby creating more demand for the stock. These will, in turn, boost its stock price over the long term, once the company gains momentum.

We discuss why AMZN is splitting its stock and what investors should consider. Splitting Its Stock Is A Natural Path For AMZN

AMZN indicated “a heavy employee purchase program ” ( read: share-based compensation ) for the stock split. By reading between the lines, one can easily surmise that mass insider selling would most definitely occur once the stock split is completed. To date, based on Dataroma , the latest insider sale transaction was by Andrew R. Jassy, the president and CEO of AMZN, on 22 February 2022 for 492 shares at $3K each, amounting to a total of $1.48M. However, we would like to reiterate that insider selling does not infer anything negative about the company’s performance, given how share-based compensations are often used to reward employees. AMZN reported: This split would give our employees more flexibility in how they manage their equity in Amazon and make the share price more accessible for people looking to invest in the company. ( Seeking Alpha ) The COVID-19 pandemic has obviously led to a retail trading boom, with the aid of no-fee stock trading policies by major trading firms. The strategic move will also bring more retail AMZN investors on board post-pandemic. Given that AMZN stock would trade for around $139 per share (based on 9 March’s price) post-split, its accessibility would obviously improve, making trading easier for buyers and sellers. Though Robinhood may offer fractional shares through Robinhood, we believe its benefit is beyond the obvious.

AMZN’s Rise In Valuation Since 1999 To 2022 Macrotrends 2022 marked the first time that AMZN stock split since splitting twice in 1998 and once in 1999. Those who continue to hold on to AMZN stock, would have seen its portfolio value rise over 50-fold since then. Let’s also examine AAPL, NVDA, and TSLA, which went through stock splits recently: Since AAPL’s latest stock split on 31 August 2020 from $499.23 on a four-to-one basis, its price has risen from $134.18 on 1 September 2020 to $162.95 on 9 March 2022. It would have represented an impressive 30.5% growth in the past 14 months, without adjusting for inflation and other factors.

NVDA’s last stock split occurred on 20 July 2021 from $751.19 on a four-to-one basis to $230.14 on 9 March 2022. Its valuation has, in turn, gained 22.5% in the past seven months.

TSLA reported even better gains at 312% at $858.97 on 9 March 2022, since its last five-to-one stock split on 11 August 2020 from $1,373 pre-split.

Though these comparisons are based on absolute numbers, with no regard to dollar inflation , market situation, and company performance, it is evident that stock splits have been mostly advantageous for these three companies in the past two years. In addition, stock splits only occur for companies with higher valuations, due to remarkable growth and financials. As a result, it is a sign of good news and/or robust performance ahead, which may boost its stock gains further, moving forward. Kelly Shue, a professor of finance at the Yale School of Management, said: A very high stock price is way to remind investors to remind people they have had a great run up. It’s a reminder that they have had a great history. ( Quartz ) In addition, the reduced price per share unit will also make AMZN stock more attractive for options traders, given that one requires lesser capital to own 100 shares post-split. For example, in 2020, the daily volume for single stock options increased 68% YoY, from an average of 10.3M in 2019 to 17.3M in 2020. In addition, it expanded to a record volume […]

source Amazon Stock: Why Is It Splitting And What It Means For Retail Investors And Option Traders

Leave a Reply