Mar 10, 2022 - George Lucas
As many of you know, AMZN. has recently announced that they will be undergoing a 20:1 stock split. Let's take a look at why stock splits are beneficial for shareholders and dive into some recent examples of stock AAPL, NVDA, and TSLA splits to see how these companies performed after the split.
Expands the shareholder base. Many small or beginning investors start by investing in small amounts. If they have only $1,000 to invest, their entire investment would nearly be eaten up by one share of Alphabet (GOOG) - though not for much longer. Additionally, although illogical, it can be a very difficult psychological barrier for a new investor to spend large per-share amounts on a stock. By keeping share prices at reasonable levels, companies encourage investment by even the smallest market entrants.
Makes portfolio management easier. It is a pretty common activity in portfolio management to rebalance positions or to sell a portion of one investment to fund a new one. High per-share prices make this more difficult, as you are dealing with larger chunks of your portfolio with each share.
Makes put selling options possible. A popular and relatively safe options strategy involves selling puts to enter a position. The problem is that most brokers require you to have the full amount in cash to purchase shares if you get put. Each options contract represents 100 shares, so if you wanted to sell a put on Priceline (a $1,300/share stock), you would need a cool $130,000 in cash on hand! On the other hand, if Priceline were to do a 100-for-1 split to $13/share, you would only need $1,300 for each contract - a much more realistic scenario.
They typically outperform the market over the next several years. In a study performed by David Ikenberry of Rice University, he found that stock splits substantially outperformed the market over both 1 and 3 year periods from the date of the split. What better beneficial reason could an investor want?
Apple's most recent split took place on August 28th, 2020, which they announced on July 30th. Between the opening of the market on July 31st and the first trading day after the split August 29th 2020, Apple rose by over 34%. During this time the market (S&P 500 was up a little over 7%)
Nvidia announced their most recent stock split on May 21st, and underwent their split on July 20th. Between the opening of the market on May 22nd, and the opening of the market on split day (July 20), Nvidia's stock price increased by over 25%. During this time the market went up by a little over 8%.
Tesla announced their split on August 11th, which took place on August 28th. Between the open on August 12th and the open on August 28th, TSLA shares rose by over 52%. During this time the market went up by a little over 4%.
Credit to Jackson Dalton analysis of recent stock splits source
Over the past couple of years, there have only been 3 major US tech companies to undergo a stock split, and all of their splits have either been 4:1 or 5:1, but nothing similar to a 20:1 split. Furthermore, all of the splits mentioned above have split within 2 months of their announcement If we look at the performance of the above stocks after their split, we can see that the shorter the timeframe between the announcement and the split, the higher the return was. Additionally, we can see that NVDA took the longest, and experienced a large sell off weeks before their split.
All 3 of these stock splits experienced massive growth between their announcement and their actual stock split. The returns on these splits have ranged from 25-52%. Applying this logic to AMZN stock, we can estimate that their price will range between $4,000-6,000 on a pre-split adjusted basis.
With a 1 year price target for AMZN of $4,200 this range is reasonable. It will remain to be seen how it perform in the long term, but given the historical precedent of recent splits and a breakdown of why share splits are good for shareholder, now might be a good time to consider investing in Amazon if you haven't already.