Amazon Stock Split: The Real Reason It Matters

Investors cheered Thursday when Amazon ( AMZN -0.88% ) announced a 20-for-1 stock split.

Investors had long wondered whether Amazon, whose share price is currently around $3,000, would finally split its stock, especially after high-profile tech stocks like Apple, You’re hereand Alphabet all did the same. Amazon had not done a stock split since 1999, in the heady days of the dot-com boom. After 23 years the per-share price will be chopped to roughly $150.

The stock split, which is scheduled to go through on June 6, does nothing to change the value of the stock — shares will just be divided into smaller pieces. Though some investors see a stock split as an important milestone, it doesn’t change anything about the valuation or the fundamentals of the business.

An Amazon Prime semi-trailer truck.

Image source: Amazon.

However, Amazon’s stock split does accomplish two things. First, it makes individual shares more affordable, which could encourage more buying among retail investors and even help employees buy the stock. Second, it potentially makes the stock eligible to join the Dow Jones Industrial Average, the exclusive group of 30 blue-chip stocks that has been a kind of shorthand for the overall stock market for more than 100 years. Since the Dow is price-weighted, it can’t include stocks trading for thousands of dollars per share — that would skew the index too much. But if Amazon’s per-share price were $150, that would fit in well with other Dow stocks like Apple, walmartand waltz disney.

Along with the stock-split announcement, the company said that it was authorizing a $10 billion share buyback, also an unusual move. That will be the company’s first since a $5 billion repurchase authorization in 2016, of which it used just $2.12 billion.

why it’s significant

Together, the stock split and the share buyback authorization signal a new stance for Amazon, one that may seek to be more friendly to shareholders and return capital to its investor base. Though the $10 billion buyback allowance represents less than 1% of the company’s market cap, it also suggests that management believes the stock is cheap enough that buying it back is a good use of capital.

Founder and longtime CEO Jeff Bezos famously built the company with a long-term focus and touted that strategy often. In his first letter to shareholders in 1997, Bezos stressed the importance of long-term thinking, which included focusing on long-term market leadership rather than short-term profitability or pleading Wall Street.

Unlike most CEOs, Bezos did not participate in the company’s quarterly earnings calls, a sign he didn’t think they were a good use of his time and that he didn’t care about Wall Street’s reaction to quarterly earnings.

Who is Andy Jassy?

While Bezos remains board chair, he is no longer CEO. He stepped down last July to devote his attention to other projects like his Blue Origin space company. Andy Jassy, ​​the former head of Amazon Web Services, the cloud infrastructure division, has taken his place.

While Bezos carved out a larger-than-life persona as he built Amazon, Jassy has kept a low profile since taking the reins. He hasn’t participated in earnings calls, has been quiet on social media, and has only done a handful of press interviews. It’s been unclear what Jassy’s management philosophy and strategy are, and whether they differ from Bezos’.

The stock split and share buyback announcement, then, are the first major departures under Jassy from Bezos’ overarching philosophy. They also signal that the company has become fundamentally different from when it was plowing all of its profits into growth.

Amazon has become a profit machine, with $25 billion in operating income in 2021, but the business also seems to be transitioning to maturity. The company is the second-biggest in the world by revenue, behind Walmart; the law of large numbers means that growing at the breakneck speed investors have been used to is getting more difficult. After putting up $470 billion in revenue last year, the company would have to add $94 billion in new sales to grow 20%. That won’t be easy.

In other words, the stock split and share buyback mean that Jassy may be more willing to turn to conventional moves to create shareholder value, which could even include a dividend down the road. There are also signs that Jassy is scaling back on some of the company’s experiments, closing its physical bookstores, 4-star stores, and mall pop-up kiosks.

It’s still too early to know Jassy’s overall strategy, but the Jassy era could be less focused on experimentation and more on doubling down on the company’s strengths, of which there are many. That formula worked well for Apple’s Tim Cook, who instituted a dividend and buyback after co-founder Steve Jobs had long refused to do either of those things.

Based on the market’s reaction Thursday, the stock split and the share buyback look like winning moves.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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