Why Are Amazon, Alphabet And Tesla All Splitting Their Stocks?

It’s a stock split frenzy, and Amazon is getting in on the action. They’re the latest in a string of big names to implement or announce a stock split, drastically increasing the number of shares on offer to investors. Alongside Amazon, 2022 is also likely to see stock splits from Alphabet, Shopify, Tesla, Nintendo, and the ever-present GameStop.

But this isn’t a recent phenomenon. Over the years, many public companies have implemented stock splits, including one class of Warren Buffet’s Berkshire Hathaway stock in 2010 and Apple, which has split five times since its IPO in 1980.

Amazon first announced the plan to complete the stock split back in March, offering existing shareholders an additional 19 shares for every one they hold in a 20-1 split. The split ratio that each of these companies is offering to shareholders is different, but with so many billion-dollar businesses looking to complete a stock split, there must be something to it.

Download Q.ai for iOS for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.

How does a stock split work?

Any shareholder with Amazon stock on May 27th will receive an additional 19 shares for every one share they hold when the stock split happens on June 3rd. This won’t cost the existing shareholders anything, and the value of their holdings won’t change due to the split.

So if the current Amazon share price is around $2,500, a shareholder with three shares will see a change on their statement or app a few days after the split date. Their overall investment will still be around $7,500 (assuming the market doesn’t tank or soar), but rather than having three shares, they’ll have 60.

The only difference is that the price of each of those shares will reduce significantly. In this example, the share price would decrease from $2,500 each to $125 each. For many investors, that’s the extent of it. A slightly different number on an app and the hope that the split will boost the share price (we’ll get to that in a minute).

Download Q.ai for iOS for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.

Why split stock?

So far, a stock split seems a bit pointless, right? A different set of numbers on a statement, but the company still does everything the same way it did before, the market cap (company valuation) doesn’t change and the shareholder’s stock value stays the same. So why do it?

There are plenty of reasons, and most of them come down to investor psychology. As a share price goes up, it can start to seem unaffordable. A share price of $1 means that your $2,500 can buy thousands of units of stock. A $2,500 share price means you can buy 1. The human mind is a weird and wonderful thing, and for some reason we can perceive the expensive stock as worse value, even if the market cap for each company is the same.

This issue goes beyond perception for investors with more modest portfolios. For those with $10,000 to invest, purchasing Amazon stock at its current price would mean almost 25% of the total portfolio would be invested into a single company. That’s a significant concentration, and most professional investment managers would suggest it’s a pretty bad idea from a diversification standpoint.

At a share price of $125, a unit of Amazon stock would mean that investors would only have 1.25% of their portfolio exposed to the company, which leaves a lot more room for diversification.

It also helps with the liquidity of the stock. Smaller chunks can be sold off by investors, and Amazon themselves stated in their filing that the move would make it easier for their employees to manage their Amazon holdings. Previously, if they wanted to get their hands on $1,000 in cash, they would need to sell a full share and then reinvest the rest. After the stock split, they’ll be able to sell off a few units and get pretty close to the $1,000 they need.

Let’s be honest though, Jeff Bezos and his board of directors aren’t making this move purely to help out the little guy who wants to go on a summer vacation. All of the above reasons are true, but it matters to existing shareholders because of the potential to increase the Amazon share price. With a more affordable entry point, more investors will potentially look to get into the stock, which could increase demand and, therefore, increase price.

Why split the stock now?

There’s an added benefit to Amazon for doing this now. It’s no secret that the US tech sector is bleeding pretty badly so far in 2022. Amazon themselves have seen their stock price fall by almost 30% at the time of writing. The stock values of the likes of Apple, Netflix, Meta, and Microsoft have all taken a similar beating.

For investors with even a passing interest in the market and Amazon’s stock price, it’s pretty clear it’s been a tough year for a company whose share price was hovering around the $3,250 mark for most of 2021. A stock split can reset that perception.

With a new share price of say, $125, that context and price association is lost. Sure, it wouldn’t take much research at all to work out what’s happened, and charts are adjusted to reflect the new shares, but again, it’s all about perception.

Amazon’s previous stock splits

This will be the fourth time that Amazon has split their stock. For some strange reason, back in the late 90s, they were a bit obsessed with trying to keep the stock price at around $100. Given how quickly the price was rising during the dotcom bubble, this meant that they split the stock in June 1998, January 1999 and again in September 1999. Pretty soon after that, the dotcom bubble burst, and Amazon management didn’t have to worry about the share price being too high anymore, with it crashing to less than $6.

So we can’t learn much from the past when it comes to Amazon’s previous stock splits, but we can look at how other companies have performed when they’ve done the same thing. The stock split shouldn’t really change anything, because the company’s fundamentals will remain exactly the same. With that said, since 1980, companies that split their stock have outperformed the S&P 500 by 16.3% in the following 12 months.

Now, this is an excellent example of correlation not necessarily implying causation. Realistically, the stock split is almost certainly not what has caused this average performance to be so much higher than the market. Companies that do stock splits have generally seen a nice run-up in their share price, which is often a big factor in deciding to split in the first place. This will usually mean that they’ve been doing well as a business, and were probably already outperforming the S&P 500 before the split.

What we do know is that so far, the news has been very positive for the Amazon share price. As of the market close on Wednesday June 1, Amazon is trading at $2,433.68, a 17.22% gain over the past 5 days.

What this means for investors

So far, you may be reading this article thinking we’ve missed something. The world has moved on dramatically since Amazon’s first stock split back in 1998, and these days you don’t have to buy a full share in any company. Many trading and investment apps will now allow you to buy fractions of a full share.

That’s true, and exposure to a company using fractional shares can be a great way to access investments that you might not be able to otherwise afford. However, it’s important to remember that this is only possible due to a bunch of technical workarounds going on behind the scenes of your investment app or trading platform.

Generally, the app or platform will be matching you up with a bunch of other investors and making your trades all together. So if you have $1,250 to buy 50% of an Amazon share, they’ll find another investor who wants to do the same, buy the share and then give you half each.

This means that there are often quite a few restrictions with fractional shares. For example, brokers only want to do this for big, highly traded companies. That way, they can always be pretty sure they can find a match for the fractional trades. Transferring these fractional holdings to another broker will also often be tricky. This could mean you have to actually sell them and then re-buy them, which could have tax consequences or mean you’re exposing yourself to time out of the market.

It also means you’re less likely to have the same shareholder rights, like the ability to vote on company decisions. Probably not a big deal for most investors, but can be important if you want to have a say in new initiatives like the company adopting sustainable business practices.

Realistically though, if you’re relying on fractional shares and stock splits to get your portfolio set up right and diversified enough, there are better options out there.

Q.ai is a great example, and with our Emerging Tech Kit, we use AI to identify smart investment opportunities in the sector that can include the likes of Amazon, Tesla and Alphabet. This allows you to invest in the best of the tech industry, without needing to worry about the price of the individual stocks.

To learn more about this and the other investment kits we offer, check out our Learn Center.

Download Q.ai for iOS for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.