Should You Buy Amazon Before Its Stock Split?

Should You Buy Amazon Before Its Stock Split?

The short answer is yes, but the longer answer has nothing to do with the stock split.

Last night, Amazon ( AMZN 2.40% ) announced that it would be splitting its stock 20-for-1, the first time this $3,000 stock has split its shares since September 1999! In conjunction with the stock-split announcement, Amazon also upped its share repurchase program to $10 billion, from the $5 billion program that had been in place. On the announcement, Amazon shares soared nearly 7% in after-hours trading Wednesday.

So, should investors follow management’s hint and buy shares ahead of the split? Following Alphabet’s lead

Amazon’s move had been a topic of conversation among investors ever since CEO Andy Jassy took over the reins from founder Jeff Bezos last summer, and more recently after FAANG competitor Alphabet ( GOOG 5.18% ) ( GOOGL 4.97% ) announced its own stock split back in February.

Stock splits do not increase or decrease the value of the company, of course; they merely divide shares up into smaller, bite-size pieces. But they do make buying the stock easier for smaller shareholders who may not have $3,000 to invest. The advent of brokerages offering fractional shares has somewhat mitigated this problem for the small buyer, yet many investors still retain brokerage accounts that don’t offer fractional shares. So the split could have some effect on a stock’s liquidity and options activity.

Some CEOs don’t like the enhanced liquidity that comes with a lower share price. Notably, Warren Buffett has never split the shares of Berkshire Hathaway ( BRK.A 2.14% ) ( BRK.B 2.16% ), which now go for a whopping $488,245 per Class A share! Buffett didn’t want to attract short-term investors looking to make a quick buck, and more-liquid, lower-priced shares have a tendency to make bigger moves up and down with more trading activity.

That being said, Berkshire was forced to offer lower-priced Class B shares in 1996, in order to head off the formation of investment trusts that allowed smaller investors to have a “piece” of Berkshire — for a fee, of course.

It appears Jeff Bezos took a page out of Buffett’s playbook following the dot-com crash of the early 2000s, never splitting Amazon’s stock again after it crashed more than 90% during that period. So why the stock split now?

Obviously, Amazon’s stock has done quite well since it last split. But as shares soared above $3,000, they’ve hit a roadblock, especially compared with other high-profile tech stocks that have split during the past two years: AMZN data by YCharts. Could this underperformance have to do with the lower liquidity in Amazon’s stock? It’s hard to say, but it’s possible management might be feeling some heat from employees (many of whom get paid in Amazon stock) over the stock’s recent performance. Amazon has doubled its employee count since the beginning of the pandemic and is in a global war for tech talent, so a lagging stock price could affect its ability to hire top engineers.

As you can see above, shares have badly lagged the market and many of its large-cap technology peers over the past 20 months or so. Alphabet, Apple , Tesla , and Nvidia have each split their stock at some point over the past 20 months, with Apple and Tesla splitting in August 2020, Nvidia splitting in July 2021, and Alphabet just recently announcing its split, which has not yet taken effect.

It’s not clear if this is the reason for their outperformance; investors have been wary of e-commerce stocks amid economic reopening and higher inflation. But it appears management may think this is at least part of the reason. Don’t buy Amazon for the split, though; buy it for these reasons

While many view Amazon as an unbridled growth stock, investors should not underestimate the company’s capital allocation prowess. More than the stock split, investors should buy the stock because it appears cheap on the basis of the sum of its parts, and it looks like management feels the same way. And there are many smart people working at Amazon.

The fact that Amazon is getting aggressive with share repurchases is telling. Under Bezos, Amazon sought to spend as much money as possible on growth ventures, so the fact that management is upping share repurchases means it must see its stock as woefully undervalued.

Amazon also is coming off a massive two-year investment cycle since COVID-19 hit, but that should be winding down now as growth trends normalize. So free cash flow could skyrocket this year as […]

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