Tech giant Amazon (NASDAQ:AMZN) recently announced a 20:1 stock split and a $10 billion share buyback plan. Fundamentally, the business stays the same, but it does signal a reset in the company’s communication with its investors. Among other things, the split will enable the company to attract significant retail trader interest and improve the liquidity of AMZN stock.
Amazon occupies a unique position in the tech world with its diversified business offerings. It has successfully expanded into numerous profitable verticals, establishing its position as a growth juggernaut. Consequently, its shares have yielded over 250% returns in the past five years.
However, AMZN stock has soared to unfathomable heights with its breathtaking performance. Its shares have become out of reach for most investors, which should change with the split. Coupled with the buyback plan, you sense that the company will be returning plenty of capital to its shareholders.
What Does Amazon’s Stock Split Mean for Shareholders?
A stock split decreases the value of a company’s shares by increasing the outstanding share count. It doesn’t impact the company valuation, as it simply offers more slices of its proverbial pie. However, it naturally makes the stock more affordable to investors and is often a vote of confidence for greater growth down the line.
Amazon will make its stock more attractive to the broader market with a substantial increase in its trading volume. The split will significantly increase its liquidity and indicate a positive signal to analysts. Moreover, it will be in a position to offer share options to more employees. Previously its shares were too high to give out as bonuses to some of its employees. However, Amazon will now have more flexibility in peppering the compensation package with equity. Also, it will be up for inclusion in the Dow Jones Index soon.
Many have speculated whether the move could be an attempt at a clean slate from the company CEO Andy Jassy. The situation is compared to how Apple (NASDAQ:AAPL) CEO Tim Cook ushered in a new era for his company with a 7-for-1 stock split in 2013. Cook received a lot of criticism before that, but AAPL stock has been on a widely successful run since then.
Poised to Become Even Bigger
Amazon has been a cash-flow generating machine over the past several years. Its five-year average, free cash flow growth has been over a spectacular 30%. Much has to do with its leadership position in two of the biggest online sectors in e-commerce and cloud. Amazon accounted for over 40% of U.S. e-commerce last year. Despite the tougher comps, it continued to prove its dominance in the sector. By 2024, the sector will grow by almost 50% to $2.35 trillion. If Amazon can only get a small fraction of that pie, it could add billions in revenues.
Furthermore, its cloud business has been on fire, another critical growth catalyst. Amazon Web Services (AWS) has expanded significantly over the years and has registered an impressive 256% growth in the past four years. The global cloud computing sector is expected to rise to a mind-boggling 1,554.94 billion by 2030, and AWS is at the forefront of this revolution.
What to Do With AMZN Stock
Amazon’s businesses have created spectacular wealth for its shareholders. However, its staggering numbers took its stock to the moon, making it difficult for retail traders to think about investing in it.
However, all that is likely to change with its stock split, as it looks to expand its attractiveness to new investors. Hence, AMZN stock is one tech stock that will probably be on everyone’s radar soon.
On the date of publication, Muslim Farooque 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
