This is about to change.
Amazon (AMZN) is doing what is known as share splitting, which increases the number of shares the company has outstanding and also lowers its share price, making it more affordable for the average investor.
The split, which takes effect Monday, will be a 20-for-1 transaction, which means that if you own one share of Amazon, you will receive 20 shares after the split, each costing about 1/20 of the previous price. So the value of your investment doesn’t change, and one Amazon stock that trades for just under $ 2,450 will become 20 stocks, each worth a little over $ 120.
Why is Amazon doing this now? Companies with incredible stock prices often announce divisions to make stocks look more affordable to retail investors. The owner of Google and YouTube Alphabet (GOOGL), which is trading at over $ 2,300 and has a market capitalization of nearly $ 1.5 trillion, also approved a 20-1 split in July. Online retailer Shopify (SHOP) has a 10-to-1 share split planned for later in June, while Tesla (TSLA) and game-favorite meme GameStop (GME) have also offered a split.
But here’s the thing: while stock splitting may seem like stocks are more affordable now, it doesn’t really make stocks cheaper when considering valuation measures like price-earnings or price-sell ratios.
Amazon will still cost about $ 1.3 trillion after the split. The shares will still be traded for more than 150 times more than this year’s earnings forecasts and nearly 2.5 times more than expected sales for 2022 – ratios that are significantly higher than the wider stock market, as well as other leaders in retail such as Walmart (WMT) and Target (TGT). Many individual investors who wanted to own growth stocks such as Amazon, Google and Tesla were often forced to buy partial stocks (ie pieces of one stock) or gain exposure to these companies through popular exchange traded index funds. such as the SPDR S&P 500 ETF or the Invesco QQQ ETF, which tracks the Nasdaq 100.
That’s why making stock prices of four-digit stocks more affordable is a “smart move,” according to Michael Mulani, director of global market 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 trade has increased dramatically in the last year and a half and has become very important again. It’s not just big institutions and hedge funds,” Mulani said. “But it is impossible for an average investor to buy 100 shares of some of these shares at these prices.
Professional investors also paid attention. Shares of Amazon have risen nearly 6% in the past week, as some retailers may want to buy before the split takes effect. (Amazon is still down more than 25 percent this year.) The division of Amazon and Alphabet could serve another purpose: it could increase the chances of both companies eventually being added to the Dow.
This prestigious group of 30 leading US companies is weighted by price instead of market capitalization index. So at their current stock prices, Amazon and Alphabet cannot be added to the Dow without having a huge impact on the daily movements of the index.
UnitedHealth (UNH), which is trading at just under $ 500 a share, currently has the largest weight in the Dow, followed by Goldman Sachs (GS) and Home Depot (HD), each trading for more than $ 300. The high share price was one of the main reasons why Apple (AAPL) was not added to the Dow until 2015, a few months after the split split pushed its price from high three-digit numbers to below $ 100 a share.
So the impending separation between Amazon and Alphabet could pave the way for these tech titans to join Apple and Microsoft, the only two companies in the United States with a higher market value than Amazon and Alphabet in Dow.
Is inflation finally reaching its peak?
Big technology stocks are not the only things with inflated prices. Consumers and businesses have been dealing with rising prices for goods and services for most of the past year. Investors will see again how high prices have risen when the US government released its latest Consumer Price Index (CPI) data on Friday.
Prices rose 8.3% in the last 12 months to April. But this increase, although still persistently high, was the first drop in consumer inflation on an annual basis since August. Consumer prices rose 8.5% in the 12 months ended March. So economists hope the level of price increases will continue to decline over the next few months.
However, it may take some time for consumer prices to reach a level that is more convenient for buyers … and the Fed. The Fed would ideally like to see the CPI slow to about 3% to 3.5%, if not lower, before declaring victory against inflation.
“The good news is that inflation needs to start falling,” said Ken Shinoda, portfolio manager at DoubleLine. “The question is, will they go down enough?”
Next
Monday: Division of Amazon shares. Apple’s World Developer Conference kicks off.
Tuesday: United Natural Foods (UNFI), Smucker (SJM) and Casey’s General (CASY) Wednesday: Campbell Soup (CPB), Brown-Forman (BFB), Ollie’s Bargain Outlet (OLLI) and Five Below (FIVE) Thursday: meeting of the European Central Bank on interest rates; weekly U.S. unemployment applications; profits from Nio (NIO), Signet Jewelers (SIG), Vail Resorts (MTN), DocuSign (DOCU) and Stitch Fix (SFIX)
Friday: meeting of the Bank of Russia on interest rates; US consumer price index; Consumer sentiment at the University of Michigan in the United States
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