Amazon ( AMZN -0.88% ) announced a 20-for-1 stock split after the market closed on March 9. Typically, a split announcement draws a lot of attention to a stock, and Amazon is no exception.
Despite recent loss-taking by the broad market, Amazon’s shares were up more than 6% on the day following the announcement. That said, a pending split should not be the sole reason investors buy or sell a stock.
Let’s look at some of the details of the announcement and, more importantly, at Amazon’s business prospects to determine if investors should buy its stock before the split.
Amazon announces 20-for-1 stock split
While Amazon announced the 20-for-1 stock split on March 9, the move will not go into effect immediately. Management still needs to gain shareholder approval on a vote slated for May 25. If approved, Amazon will trade on a split-adjusted basis on June 6.
Note, however, that the change will not increase or decrease shareholder ownership. You will not suddenly own 20 times more of Amazon’s business than before the split. Instead, your current ownership will be sliced more thinly. In the end, shareholders are left with the same magnitude of ownership, split into more pieces.
Amazon’s business prospects
Digging into Amazon’s business prospects, investors may find it more exciting than the news of the split. The company has increased revenue from $61 billion in 2012 to $479 billion in 2021. The explosive revenue growth has flowed to operating income, which increased from $676 million to $24.9 billion in that same time.
Amazon has evolved through the years, starting from a tiny bookseller to an e-commerce giant and now much more. Indeed, its more profitable Amazon Web Services segment has grown to an annual revenue run rate of $71 billion as of its quarter ended December 2021. What’s more, Amazon generated over $30 billion in advertising revenue in the trailing 12 months.
It has all crescendoed in excellent shareholder returns and earnings-per-share growth. In the last decade, Amazon has compounded earnings per share at a rate of 47.1%. Similarly impressive, its share price has increased by more than 1,500% over that period.
Amazon’s stock price valuation
Fortunately for potential investors, Amazon has been selling at its lowest price-to-earnings (P/E) ratio in the past five years. The market is concerned about how the economic reopening will affect sales and customer retention at Amazon in the near term. As a result, Amazon is trading at a P/E of 45, down from its peak of over 240 reached in 2018.
Before or after a stock split, Amazon is an excellent stock to buy for long-term investors. Better yet, to minimize the impact of trading activity surrounding the stock split, investors can split their purchase in two, buying half of their allocation before and half after the June 6 inflection point.
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.