Here's Why Amazon (AMZN) Should Consider a Stock Split

Here at Zacks, we rarely ever discuss a stock’s market price when determining if you, the potential investor, should consider investing into a company. We have a system that puts an emphasis on earnings estimate revisions to find stocks that will hopefully be winners. When determining value, we put a premium on a stock’s Forward PE figure than what the stock is trading for on the market.

With that being said, stock prices do at times reach a point where they are simply too expensive for many common investors. The one company that comes to mind rather quickly is Amazon.com Inc. (AMZN). Currently, Amazon is trading for about $670 per share.

 Last week, Amazon released its fiscal 2016 first quarter and crushed expectations. The company had earnings per share of $1.01, demolishing our estimate of $0.61 per share, and sales of $29.13 billion that topped the Zacks consensus estimate by a whopping $1 billion. Once the earnings report was released, Amazon’s stock shot up 11%. That percentage increased raised Amazon’s stock price from roughly $600 to its current trading price.

As Amazon continues to generate revenues, primarily through its Web Services as it had 64% year-over-year growth, and maintains its popularity, its stock price follows suit and becomes more and more expensive. Its $670 per share price has reached the point that regular folks who casually like to invest simply cannot afford the stock. Because of this, Amazon should strongly consider performing a 6-for-1 stock split, making its stock more affordable on the open market.

Let’s do a quick recap on what a “stock split” is. It’s an action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases and the per share price decreases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split did not add any real value. 

For example, let’s say that Company X has 60 million shares outstanding and the shares are trading at $600, which would give it a $36 billion market capitalization. The company’s board of directors decides to split the stock 6-for-1. Right after the split takes effect, the number of shares outstanding would become 360 million, the stock price would be $100 per share, and the market cap remains unchanged at $36 billion.

The only thing that changes for Company X is the optics, creating an illusion of affordability. If you own shares of Company X, your total investment doesn’t change, but rather how it is divided up.

So, if the total amount of an investment isn’t altered, what is the purpose of performing a stock split, especially for a successful company like Amazon? First, a stock split makes purchasing a standard board lot of 100 shares more affordable and easier. Currently, 100 shares of AMZN stock will cost $67,000. If the company were to perform a 6-for-1 split, those 100 shares will only cost roughly $11,167.

The second reason why Amazon should consider the proposed split is to facilitate more trade by creating greater liquidity – the degree to which an asset can be quickly bought or sold in the market without affecting the asset's price.

In theory, splits should have no effect on a stock's price, yet they often result in renewed investor interest, causing a positive impact on the stock price. While these price surges can be temporary, the fact remains that stock splits by blue chip companies – Amazon is absolutely a “blue chip” company – are a great way for the average investor to accumulate an increasing number of shares in these companies. 

People love Amazon.com because you can find essentially anything you need – and don’t need – and its Prime service is simply an amazing deal. A $99 annual fee or $10.99 per month to get free 2-day shipping on all products sold and backed by Amazon, Amazon Prime Video, and so much more? That’s tough to beat.

Individuals not wrapped up in the world of investing are not going to spend their money on an investment with a market price of over $600 per share, even if it is Amazon. Regular Joe would rather have 670 shares of AMZN stock at $100 per share than 100 shares of AMZN stock at $670 per share, despite being worth the same. Furthermore, there is a perception that the chances of that $100 stock price increasing to $200 per share are greater than the $670 stock price increasing to $1,340 per share, even though the percentage change is one in the same, 100%.

If Amazon were to split its stock to make it more affordable on the open market, people would jump on the opportunity to invest in Amazon without question, in turn increasing the demand of the stock that should theoretically lead to shares increasing in value. It’s quite difficult right now for people to allocate $670 for simply one share of Amazon stock. A 6-for-1 stock split changes everything.

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