I typically avoid writing about Amazon (NASDAQ:AMZN) because it’s hard to find a compelling story. AMZN stock will be a long-term buy until it won’t be. And given that there is no company that looks to be overtaking Amazon on either its e-commerce or web services front, AMZN stock continues to look like a solid buy.
Nevertheless, I was curious about how the stock would perform after the company announced it would be splitting its shares in June. After that 20-for-1 stock split, AMZN stock will be trading at levels not seen for over a decade.
Does this mean that Amazon will suddenly become undervalued? Not quite. A stock split will lower the AMZN stock price. But it will also increase the number of shares. A good analogy I’ve heard to describe a stock split is that it divides the same size pizza into more slices.
With that said, I still believe investors will flock to Amazon stock for two reasons. One is psychological. When it trades at around $150 a share, AMZN stock will be more accessible. That means that some investors who are buying fractional shares today may be buying entire shares in the future.
And the second reason is more fundamental. Although an entire generation has grown up never knowing what life was like without Amazon, this is still a company in growth mode.
AMZN Stock Still Has Some Growing to Do
Amazon is not resting on its laurels. The company has aggressive expansion plans for every part of its business. For example, Amazon has plans to scale its fulfillment network, invest in its Amazon Prime subscription service and to expand the reach of Amazon Web Services (AWS).
In the past 10 years or so, that wasn’t that big of a deal to investors. Interest rates were at historic lows. Today, Amazon will be making these investments in a rising rate environment and with inflation at record highs.
This means that the company is going to endure higher costs in the short-term. And so, investors who are concerned with the company’s slower earnings growth may continue to harbor those concerns.
However, when you’re investing in a growth company, you can look at those costs as an investment. That kind of investment has paid off for Amazon shareholders in the past. And remember, AWS delivers nearly three quarters of Amazon’s operating income. That is sticky revenue that will only be growing.
Follow the Smart Money
Amazon’s stock split brought to mind Apple (NASDAQ:AAPL), a company that conducted its own stock split in 2020. At the time, I felt that retail investors had been doing the heavy lifting on AAPL stock. In fact, in the quarter prior to its stock split, institutional selling had outpaced institutional buying. That changed in a big way in the quarter when the split took place.
By contrast, Amazon continues to show strong interest from institutional investors. That will only increase by the time of the split. This may be a reason for retail investors to stay away until after the split. The higher AMZN stock goes in the short term, the higher the final split price will be.
Buy Now or Buy Later?
Last year at this time, I would have advised waiting until the stock split. That is because AMZN stock was range bound for much of the year as investors weighed the impact of the company’s infrastructure investments on future earnings.
Today, it appears to be full steam ahead for Amazon. So, there is no right answer to the buy now or buy later question. If you’re looking for an insightful approach complete with trading ideas, I’d encourage you to read InvestorPlace’s Tim Biggam’s article, which you can read here.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
