The real implications of Amazon’s stock split

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Amazon decided to split its stock 20 to 1 after two decades. Many companies have implemented the strategy, including big names like Apple, which has split its shares five times since the company went public in 1980. Tesla, Alphabet, Shopify, Nintendo and Gamestop are also jumping on the bandwagon. the split of shares.

But what do companies achieve by splitting shares?

Stock Splits: A Brief Overview

A stock split is a corporate move where a company increases the number of its outstanding shares by issuing more shares to its shareholders. The stock split brings the value per share back to a comfortable range and leads to more takers.

For example, investors holding 100 Amazon shares with a valuation of $2,785.5 per share before June 6 will get 2,000 shares at a price of $139.28 per share. However, the total stock value will remain the same at $278,550. The split will not affect the total valuation of investors’ holdings.

Amazon has undergone four stock splits since the company was founded on July 5, 1994. While the company previously split its shares at ratios of 2:1 and 3:1, the latest 20:1 split is a leap ahead.

It took ten years for Amazon shares to really rally after the last split in 1999. Later, Amazon launched the Prime subscription service in 2005 and Amazon Web Services in 2006, and the rest was up to the story. Now, 15 years later, Amazon has grown from an e-commerce platform to a conglomerate, with 100 million Prime subscribers (in 2020) and AWS accounting for 74% of the company’s operating revenue .

The global COVID-19 pandemic has caused Amazon’s revenue to skyrocket. Recently, Amazon’s stock price hit an all-time high of $3,773.08 and has remained in the 3,000 territory throughout 2021.

Companies go the stock split route for many reasons. Stock splits will improve Amazon’s trading liquidity and make its stock more attractive due to the lower price. A stock split also signals the financial health of a company. In 2021, Amazon reported revenue of $470 billion, a 22% year-over-year increase. The company’s net profit was $33.4 billion, a gain of more than 56% over the previous year.

While business is undoubtedly on the rise, Amazon’s stock price had so far fallen around 25% in 2022 amid the bursting of a tech bubble. The company posted its first quarterly loss in seven years in the first quarter of 2022 due to rising inflation, a lingering supply chain crisis and a poor investment in electric vehicle startup Rivian. RIVN shares are down 65% so far this year).

Before the split, an Amazon stock would cost you $2,785 — a tall order for new investors who want a piece of the stock. Sure, some brokerages offer fractional Amazon shares, but the fact remains that a high share price can be a hindrance for most. The stock split will address this concern, making the stock affordable to a broader base.

The stock split trend

After Amazon’s declaration of the 20-to-1 stock split, many other companies followed suit and announced that they were splitting their shares.

Tesla has asked its shareholders to approve a three-way stock split to help make the company’s shares cheaper for buyers. The request is included in a list of provisions that Tesla plans to present at its August 4, 2022 shareholder meeting.

Based on the recent closing price of $2,288 on May 17, Alphabet.inc, the parent company of Google and Youtube has received board approval for a 20-to-1 stock split that will take effective July 15, 2022. This is Alphabet’s first action. divided since 2014.

Shopify In., the Canadian multinational e-commerce company has secured shareholder approval for a 10-to-1 stock split that would take effect on June 22, 2022. The decision was made after Shopify shares fell by 50% this year.

Nintendo, the Japanese gaming giant, has announced a 10-for-1 stock split to make its shares more attractive to retail investors. The move will take effect on October 1, 2022.

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