Last March, Amazon announced that it would split its shares. The split happened officially on June 3, but it will only apply to investors who own shares on or before May 27. If you own one share of Amazon pre-split, you will have 20 shares on Monday, June 6 when trading resumes.
So, what does Amazon’s 20:1 stock split mean for its share price and future growth?
How the Market Reacted to Amazon’s Stock Split Announcement
At first, investors were excited to learn about the split. AMZN stock price jumped momentarily after the shareholder meeting. Clearly, investors viewed the split positively.
After the brief high, though, Amazon shares started to fall. The price reached a low point ($2,082) on May 24. But as anticipation of the split grew, Amazon shares rallied by almost 25% in a week, a massive surge in a short time period for a trillion dollar company.
It’s not entirely a surprise based on the company’s valuation alone that shares would rally. Running a discounted cash flow forecast analysis reveals upside to $3,109 per share, suggesting as much as 27.7% upside from current levels.
What Happens When Amazon Shares Split?
Companies typically split shares because they want to lower the barrier for new investors. Potential investors might not feel comfortable devoting $2,000 to $3,000 to a single share of Amazon. The split will make the shares much more affordable for the average investor. Post-split, shares will likely trade close to $125 per share.
What happens after that?
Economics 101 says if you lower price, you will see more demand. That applies to share prices too. The board of Amazon hopes that more people will put their money into the stock, which will cause share prices to rise.
You might be wondering what happens to investors who bought stock after the May 27 date to be eligible for the June 3 stock split. The answer is they will buy shares from shareholders who held positions prior to the deadline, and so they too will benefit from the split.
What Will Determine the Future Success of Amazon?
While the stock split will influence how people think about Amazon stock, it probably won’t have a significant influence on the company’s overall success. More important factors driving share price long-term will be:
- Which segments of the company will drive future growth (AWS margins in particular)?
- Growth of Amazon’s burgeoning Ad business
- Competitive threats to cloud business from Microsoft and Alphabet
A quick look at revenue projections shows the company is poised to still grow fast. Revenues are forecast to rise to $526 billion this year, $615 billion next year and $711 billion by 2024. EPS (based on pre-split prices) are forecast to rise from $16 per share this year to $57 per share next year and $93 per share by 2024.
Should You Buy, Sell, or Hold Amazon Stock?
Based on valuation alone, Amazon is trading at a 27% discount to fair value but its lower share price post-split has the potential to also attract a whole slew of new investors who could not previously afford the $2,500 per share price tag but can snap up shares at around $125 per share.
If you’re looking to own a slice of a proven, trillion dollar market cap company that is still growing top line revenues and bottom line profits at a rapid clip, yet remains significantly undervalued, this is probably the time to hop on the Amazon train.