After announcing a long-awaited stock split and a buyback program, the shares of Amazon (NASDAQ:AMZN) are finally trending in the right direction.
The Seattle-based e-commerce company’s share price has rallied over 23% since it announced a 20-for-1 stock split and a $10 billion buyback plan in conjunction with its earnings report on March 9. It’s Amazon’s first stock split since the dot-com boom in 1999 and something analysts and investors have been calling on the company to undertake for years as its share price climbed north of $2,500.00.
The stock’s move higher comes as a welcome relief to shareholders who were no doubt frustrated by the anemic 2% gain of AMZN stock during 2021. Prior to March 9, the company’s shares had been trading sideways since Andy Jassy succeeded Jeff Bezos as its CEO last summer.
Focusing on the Stock
Distributions from the stock split will be made to Amazon shareholders at the close of business on June 3, and the shares will begin trading on a split-adjusted basis on June 6, according to the company. This is Amazon’s fourth stock split since its initial public offering (IPO) in 1997, and its first since 1999.
Amazon’s shares also split on a two-for-one basis on June 2, 1998; a three-for-one basis on January 5, 1999; and a two-for-one basis on September 2, 1999. While largely cosmetic, stock splits make shares cheaper to buy and more accessible to individual retail investors. As a result, splits often spur increased buying, sending share prices higher.
Stock splits are all the rage this year. On Feb. 1, Google’s parent company, Alphabet (NASDAQ:GOOGL) announced a 20-for-1 stock split, furniture retailer RH (NYSE:RH) just disclosed a 3-for-1 stock split, and there are media reports that electric vehicle maker Tesla (NASDAQ:TSLA) plans to split its stock, which would be its second split in two years. In August 2020, Apple (NASDAQ:AAPL) split its stock on a four-for-one basis.
The split in Amazon’s stock shows that the firm’s management is turning its attention to the conglomerate’s share price, which has disappointed investors in recent months.
While AMZN stock has risen more than 4,000% since its last split in 1999, its shares have been among the worst performing technology securities over the last year and had dropped 20% prior to the announcement of the new stock split.
News of the $10 billion share repurchase program was also welcomed by investors large and small, as well as by Wall Street’s analysts. Share buybacks increase the value of the remaining shares available by reducing the number of shares that are traded in the market. So buybacks can also lift a stock’s price.
New Ventures
Amazon’s most recent quarterly results were mixed. The company announced that its revenue grew 9.4% to $137.4 billion in the fourth quarter, compared to analysts’ average outlook of $137.6 billion.
Amazon provided Q1 revenue guidance of between $112 billion and $117 billion, which was well below the average analyst estimate of $120 billion. While some of the company’s business segments continue to perform strongly, with Amazon’s advertising services sales growing 32% in Q4 from a year earlier and the revenue of Amazon Web Services (AWS) climbing by an annualized 40%, the company continues to struggle with slowing demand coming out of the pandemic and global supply chain problems.
The stock split and share buyback are just a couple of steps that Amazon is taking to compensate for its ongoing struggles. The company has also announced that it is raising the price of its annual Prime membership to $139 from $119. Additionally, it has just completed its $8.5 billion acquisition of MGM Studios, giving the company ownership of popular film franchises such as Rocky and James Bond, and announced plans to open a new chain of retail clothing stores called “Amazon Style” that will sell women’s and men’s apparel, shoes, and accessories from well-known brands.
Taken together, these new ventures should complement Amazon’s core businesses and help the company remain a market leader.
AMZN Stock Remains A Safe Bet
While not immune to the turmoil that has impacted technology stocks over the last six months, Amazon is a much more stable, established and profitable business than most tech companies. Although the company’s share price has underperformed over the past year, the stock has gotten a nice boost from the announcements of the stock split and buyback program.
And more gains are likely for AMZN stock as the share price fully recovers and then tests new highs. The steps Amazon is taking to strengthen its core business segments and diversify its revenue streams should provide further confidence that the e-commerce company remains a worthy long-term investment.
Consequently, Amazon is a buy.
On the date of publication, Joel Baglole held long positions in GOOGL and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
