For many average investors, the price of just one Amazon share has been prohibitively expensive. There are a lot of things a person can spend about $2,500 on instead of one tiny piece of “Prime” stock market real estate. A nice vacation? That home entertainment system? Season tickets for your favorite sports team?
That’s about to change.
Amazon is doing what’s known as a stock split, which increases the number of shares outstanding that a company has and also lowers its stock price, making it more affordable for the average investor.
The split, which takes effect Monday, will be a 20-for-1 transaction, meaning that if you owned one share of Amazon, you’ll wind up with 20 shares after the split that each cost about 1/20th of the previous price. So the value of your investment does not change, and one Amazon share that traded for just under $2,450 would become 20 shares that each cost a little more than $120.
Why is Amazon doing this now? Companies with sky-high stock prices often announce splits in order to make shares seem more affordable to retail investors. Google and YouTube owner Alphabet, which trades at a price of more than $2,300 and has a market cap of nearly $1.5 trillion, also has approved a 20-1 split that will occur in July.
Online retailer Shopify has a 10-for-1 stock split planned for later in June, while Tesla and meme stock darling GameStop have proposed splitting their stocks as well.
But here’s the thing: Even though a stock split may make it seem like a share is now more affordable, it doesn’t actually make the stock any cheaper when looking at valuation measures like price-to-earnings or price-to-sales ratios.
Amazon will still be worth about $1.3 trillion after the split takes place. The stock will still be trading for more than 150 times earnings forecasts for this year and nearly 2.5 times its estimated 2022 sales — ratios that are significantly higher than the broader stock market as well as other retail industry leaders like Walmart and Target.
Many individual investors who have wanted to own growth stocks like Amazon, Google and Tesla were often forced to buy fractional shares (i.e. pieces of one stock) or get exposure to these companies through popular exchange-traded index funds like the SPDR S&P 500 ETF or Invesco QQQ ETF, which tracks the Nasdaq 100.
That’s why making the share prices of quadruple-digit stocks more accessible is a “smart move,” according to Michael Mullaney, director of global markets research for Boston Partners. This should allow more investors to buy so-called round lots (100 shares) of a company instead of just a handful of shares.
“Retail investor trading has increased dramatically over the past year and a half and has become very important again. It’s not just big institutions and hedge funds,” Mullaney said. “But it’s impossible for an average investor to buy 100 shares of some of these stocks at these prices.”
Professional investors have taken notice, too. Amazon’s stock has rallied nearly 6% in the past week, as some traders might be looking to buy before the split takes effect. (Amazon is still down more than 25% this year.)
Stock splits for Amazon and Alphabet could serve another purpose as well: it may increase the chances of both companies eventually being added to the Dow.
That prestigious group of 30 leading American companies is a price weighted instead of a market cap weighted index. So at their current share prices, Amazon and Alphabet could not be added to the Dow without having an outsized impact on the daily moves of the index.
UnitedHealth, which trades for just under $500 a share currently has the biggest weighting in the Dow, followed by Goldman Sachs and Home Depot, which each trade for more than $300.
Its high stock price was one of the main reasons why Apple wasn’t added to the Dow until 2015, several months after a stock split pushed its price from the high triple digits to below $100 a share.
So the looming splits for Amazon and Alphabet could pave the way for those tech titans to join Apple and Microsoft, the only two companies in the US with a higher market value than Amazon and Alphabet, in the Dow.
Inflation finally peaking?
Big tech stocks aren’t the only things with inflated prices. Consumers and businesses have been dealing with rising prices of commodities and services for the better part of the past year. Investors will get another look at just how high prices have surged when the US government releases its latest consumer price index (CPI) figures on Friday.
Prices rose 8.3% over the past 12 months ending in April. But that increase, while still stubbornly high, was the first drop in year-over-year consumer inflation since August. Consumer prices were up 8.5% in the 12 months that ended in March. So economists are hoping the level of price increases will continue to taper off over the next few months.
Even so, it may take some time for consumer prices to get to a level that’s more comfortable for shoppers … and the Fed. The Fed ideally would like to see CPI slow to about a 3% to 3.5% clip, if not lower, before declaring
a victory against inflation.
“The good news is that inflation numbers should start to come down,” said Ken Shinoda, a portfolio manager with DoubleLine. “The question is will they come down enough?”
This content was republished with permission from CNN.