Shares of Amazon (NASDAQ:AMZN) split 20-for-1 Monday. This is the first time the company will split since the 1999 dot-com boom.
As of Thursday’s close, AMZN shares cost at $2,520.52. Adjusted for the split, a share would be trading at $126.02 if it went into effect today.
When Amazon announced the split back in March, it was on the backs of Google parent Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) announcing a 20-to-1 stock split in February slated for mid-July; Apple (NASDAQ:AAPL) sharing plans for a 4-to-1 stock split and Tesla Inc.’s (TSLA) plan for a 5-to-1 stock split. Amazon shares rose 6% in extended trading at the time of the announcement.
The question is, is Monday’s split good for Amazon’s stock? Is it time to buy?
In today’s Market360, we’re going to talk about stock splits… and whether or not it spells a good buying opportunity.
But first…
What Is a Stock Split?
A stock split is when a company decides to divide shares of its stock into smaller units. From a fundamental perspective, it changes nothing about the company or its value.
As a shareholder, it simply changes the amount of shares that you own.
Let’s say you owned 10 shares of Amazon today. After Monday’s 20-to-1 stock split, you will hold 200 shares. Every one share of Amazon you hold will be divided into 20 individual shares.
But the fact is the value of the shares remains the same.
If you had $20,000 in Amazon stock today, you’ll have roughly $20,000 in Amazon stock Monday (depending on market fluctuations of course).
As a shareholder, a split doesn’t affect you in terms of gains or losses.
With that being the case, why do companies do it?
A lot of times a company will split shares to make its stock more accessible to retail investors.
Using Amazon again as the example…
An average investor may not have the funds to invest in a stock trading above $2,000. In a small portfolio, even buying one share could be considered an over allocation, and you never want to put all of you eggs in one basket, so to speak. The reality is allocation is very important, as it helps limit an investor’s risk. It’s why I tell my subscribers to give their positions “equal weight” and to never let a single company represent more than 10% of their portfolio.
But at a little over $100, an investor with a small portfolio could buy some shares without affecting the balance of their portfolio.
The bottom line: A lower share price will make the stock more accessible to everyday investors.
Is Amazon a Buy?
Short answer, no.
Stock splits tend to attract more investors, but a split itself is not a buy signal. What’s important is looking at the company’s fundamentals.
While I think the split will help Amazon’s stock price firm up by attracting new investors, the company’s annual forecasted earnings are expected to decline 79.3%. The reality is Amazon’s first-quarter earnings results were dismal, with the company reporting a net income decline of $3.8 billion, which is a 147% decline year-over-year. The company missed analysts’ earnings estimates by 190%.
If you take a look at my Portfolio Grader Report Card, you will see an equally dismal picture for the ecommerce giant:
As you can see, the company hasn’t been a “Buy” in my Portfolio Grader for a long time and is currently sporting a D-rating for its Fundamental Grade and Quantitative Grade. So, its fundamentals are weak and money flow in the stock has all but dried up. Year-to-date, AMZN shares have fallen more than 26%. In comparison, the S&P 500 is down more than 12%. Had you been following Portfolio Grader, you would have known to steer clear.
What About GameStop?
I should add that original meme stock GameStop (NYSE:GME) is also considering a stock split in the near future. Let’s take a look at GME’s report card:
As you can see, GME is doing slightly better than AMZN with a “C” for its Total Grade. But the fact of the matter is, GameStop’s fundamentals are terrible. During the most recent earnings call, GME reported a net income decline of $147.5 million, which is a 283.23% decline year-over-year. GameStop also posted a wider-than-expected earnings loss. Analysts were calling for an earnings loss of $1.45 per share, but GameStop’s earnings loss of $2.08 per share missed analysts’ estimates by 43.4%.
So, while a split might also attract some investors to GME, I think between the two, Amazon will fare a little better over the longer term.
As I said, a stock split it is not a bullish buy signal by itself. A split doesn’t affect the underlying value of the company in any way. In other words, a stock split won’t fix the company’s fundamentals.
If you are looking to pick up shares of any company, it should always be backed by superior fundamentals. I’m talking about companies with strong fundamentals that also see persistent money flow (also known as institutional buying pressure). I’m pleased to say that my Breakthrough Stocks Buy List is chock-full of these companies. This includes a stock I recommended yesterday and four more I am adding to the Breakthrough Stocks Buy List in today’s Monthly Issue for June.
The fact of the matter is that all five stocks are backed by superior forecasted earnings and sales and persistent institutional buying pressure, as well as have benefited from positive analyst revisions recently. In other words, they offer the “one-two-three” punch for positive stock appreciation in the upcoming months.
P.S. One of the things I track when looking for a new recommendation in Breakthrough Stocks is “money flow.”
Last week in my Great American Wealth Shift event, I detailed exactly what goes into my money flow system.
During the event I reveal the No. 1 stock to buy right now… and one you should avoid at all costs.
If you missed it, you can find the replay here.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Amazon.com Inc. (AMZN), Alphabet Inc. (GOOG)
