Is Amazon a Smart Investment After its Latest Stock Split?

Amazon recently went through with a stock split, which increased the number of shares that stockholders would have in their portfolio while reducing the cost of one share.

Since its debut on the Nasdaq Stock Market in 1997, Amazon has made money for its shareholders. After all, the company, which started as an online bookstore in 1995, has grown to include all kinds of products on its website as well as incorporating other companies such as Whole Foods.

Some investors wondered whether it was a smart money move to buy Amazon after the announcement and whether it was better to invest before or after the split. Here are some things to consider now that Amazon’s stock split has been completed.

The stock split factor

On March 9, 2022, Amazon announced that its board of directors had approved the online retailer’s plan for a 20-for-1 stock split, which affected stockholders who owned shares of the online retailer at the close of business on June 6, 2022.

It was the first time the stock has split since 1999, and it has split a total of four times now, including this year’s split, since the stock had its IPO in 1997.

But what is a stock split? It’s when a company takes each of its outstanding shares owned by shareholders and splits them. That means a shareholder would have the same amount of money invested in the company but will have more shares in their portfolio.

For example, if you owned $1,000 of Amazon stock before the split, you would still own $1,000 of stock after the split as well. It’s just the number of shares that changes. With Amazon, the number of shares that you would own would increase by 20 times after the June 2022 split.

What you could have made on AMZN

At the end of August 2, 2021, a share of Amazon stock closed at $166.57 per share. By that date, Amazon's stocks had split three times (twice 2-to-1 and once 3-to-1), resulting in a 12 times increase in the number of shares you would have owned (2 x 2 x 3 = 12).

Since the June 6, 2022 stock split was a 20-to-1 split, if you had purchased Amazon stock in 1997, you would now own 240 times the number of your original shares — 12 times due to the previous three splits times 20 for the last split.

So, how much would you have now if you had invested $1,000 in Amazon during the 1997 IPO? At that time, Amazon's stocks cost $18 per share. As a result, you would have owned about 55 shares with a $1,000 investment ($1,000 / 18 = 55 shares).

However, due to Amazon's four stock splits, you would now own 13,200 shares rather than just 55. That's because the total stock splits resulted in a 240 times increase in the number of shares each investor owned (240 x 55 shares = 13,200 shares).

At the end of Aug. 2, 2022, Amazon’s share price closed at $134.16. That means your total amount of shares would be worth over $1.7 million (13,200 shares x $134.16 per share = $1,770,912) on that date.

Why AMZN split shares

You may wonder then why Amazon has ‌split shares if the amount of money invested by shareholders is the same. One of the big reasons is the cost for a single share was pretty high for the average investor, so splitting the stock may make it more attractive — and more affordable — to new investors.

For example, at the opening of trading on June 6, the first trading after the stock split, Amazon shares cost $125.25 per share. For comparison, at the close of trading on June 3, right before the split, Amazon shares cost around $2,447 per share.

"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," Amazon said in a statement about the stock split earlier this year.

Another reason for a potential stock split is liquidity. By increasing the number of shares, a company could also increase its liquidity, which is its ability to convert its stocks into cash. So, Amazon will create a larger number of shares without having to change the valuation of the company.

Announcing a stock split could also give a company a boost in its current stock price. For example, Amazon’s stock went up a whopping 6% in after-hours trading on the day the stock split was announced. And a week after the announcement, the stock broke above the $3,000 mark.

AMZN’s stock split terms

That being said, a 20-to-1 stock split is unusual as most companies use a 2-to-1 or 3-to-1 stock split. But the high split isn’t unique: Google announced a similar split earlier this year, which went into effect for Google shareholders at the close of trading on July 15.

Amazon also announced that it would buy back some of its shares, worth up to $10 billion. A share buyback reduces the number of outstanding shares, which means the supply of shares for investors to buy goes down. This may mean the stock’s earnings per share (EPS) might grow faster and also may make the stock more appealing to investors.

Should you still buy Amazon?

As with all stocks, investing money in Amazon shares may or may not be a smart investment, but much of that depends on the market as well as your own financial portfolio. Look at the basics to decide what’s best for you.

The various stock markets tend to be volatile based on current events. When you are deciding whether to buy Amazon shares, ‌consider why the stock price may have gone up or down beyond the fundamentals of the company. Also, think about the direction the company is going.

If you think Amazon has good ideas or future projects, then perhaps you should buy the stock. If you’re worried about the stock price in the past year or the company’s plans, maybe you should hold off. In any case, it’s important to research any company before you invest in its stock.

What the stock split says about Amazon

The stock split itself could also be a factor in your decision. A stock split may be a sign that a company is doing well because its share price has increased, and it also could bring in new investors who are attracted to the more affordable share price. On the other hand, it also could cause some volatility in the stock, so you may want to be prepared for changes in the price.

If you do decide to buy stock in Amazon, you may be worried that you weren’t able to buy shares before the split. But remember, the amount of money you invest in a stock will remain the same before or after a split, so you might not make money by getting the stock right before or even right after the split.

A study by the Wall Street Journal last year looked over stock split data from the past 40 years and found that overall, stocks gained an average of 1% six months after their split. But that’s not a guarantee, and like any stock market investment, a share price could go down in the months after a split.

Bottom line

Before you go out and buy Amazon, do some research and take into account things like your budget and your current investments. Remember that with all stock market investments, you are taking a risk, and stocks could rise and fall depending on a number of market factors.

If you decide you want to invest in it, look into some of the best brokerage accounts to see whether one of them may be a good fit for you as you invest in stocks.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

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