In the wake of high profile stock split announcements from frequent travelers like Tesla (TSLA) and Apple (AAPL), Amazone (AMZN) will likely be the next big company to be a “splitter” because its inventory is considerably higher than what Tesla or Apple was on a pre-split basis.
Investors know that a stock split does not add value on an economic basis because the following are equivalent:
1 share at $ 10
10 shares at $ 1
Or, as someone recently put it, “If you gave me five singles for a $ 5 bill, I’m no better off. “
However, it can be argued that stock splits bring a psychological uplift and may, during the new era of Robinhood, make “cheaper” stock more accessible to small retail investors. One need only look at the action in the Tesla and Apple stock charts to support this opinion:
Source: Yahoo Finance (author’s notes in red)
Tesla was trading at $ 1374 on August 11, the day it announced its 5: 1 stock split. By my calculations, Tesla is now up about 74% since the announcement.
Apple was trading at $ 384 on July 30, the day its 4: 1 stock split was announced. Apple has grown by around 35% since the split was announced.
Currently trading at $ 3,478 / share, one could argue that Amazon is much more in need of a split than Tesla or Apple. After all, Amazon only split its stock three times, all in the late 1990s:
Source: Yahoo Finance (author’s notes in red)
The previous divisions were:
- 6/2/98 – 2: 1
- 1/5/99 – 3: 1
- 9/2/99 – 2: 1
Surprisingly, Amazon didn’t split the stock even once in the 2000s. As a result – as the graph above shows – the average daily trading volume fell while the stock price rose significantly. .
I have checked the last four conference calls, and there hasn’t been any discussion of a split as far as I know. While Amazon seems like a solid choice to add to DJIA, as we have seen from the effect of Apple’s stock split, high-priced stocks can cause a lot of turmoil for DJIA. If Jeff Bezos wants to be in the DJIA, he will need to split the stock in order to bring the price down to a level that can be more easily managed by the index.
Regardless of a stock split (or not), a stock split shouldn’t be an investment thesis for any company, and it’s not for Amazon: fundamentals and financial performance are the foundation. investment in the business.
The highlights of Amazon’s latest Q2 EPS report were:
- Net sales rose 40% to $ 88.9 billion in the second quarter, from $ 63.4 billion in the second quarter of 2019.
- Operating cash flow increased 42% to $ 51.2 billion for the TTM period compared to the prior year period.
- Q2 net profit of $ 5.2 billion ($ 10.30 / share) nearly doubled compared to net profit of $ 2.6 billion ($ 5.22 / share) in Q2FY19.
Free cash flow jumped and at $ 31.85 billion in Q2 (+ 27.6% year-on-year) equated to around $ 61.60 / share based on 517 million shares outstanding as of 30 June 2020:
Source: Q2 presentation
As can be seen in the graph above, Amazon’s cloud computing business (Amazon Web Services or AWS) continues to grow rapidly and has added several new customers including HSBC, IHS Markit, Formula 1 Racing, Bundesliga (the best football league in Germany) and Capella Espace.
And Amazon continues to adapt and innovate. Forbes reports that Amazon has ordered a fleet of 1,800 Mercedes-Benz electric vans, as part of its initiative to achieve its goal of carbon neutrality by 2040. Meanwhile, CNBC reports that Amazon has received the Federal Aviation Administration (“FAA”) approval to operate its fleet of Prime Air delivery drones. The FAA said the approval would give Amazon the ability to “safely and efficiently deliver packages to customers.” Alphabet (GOOG) «Wings» et UPS (UPS) had previously obtained FAA approval for its drone delivery systems.
Amazon must continue to evolve and adopt as Walmart (WMT) has just announced its “Plus” subscription at $ 98 / year to compete with Amazon Prime. But Prime has a big head start: It’s a 15-year-old program with over 150 million users, and plenty of other perks – including the Prime video library, Amazon Fresh grocery deliveries, and no minimum delivery for many low priced items. Consumers get all of this for $ 119 / year – just $ 21 / year more than Walmart’s plus.
Summary and conclusion
Amazon continues to evolve and has become a (the?) Vital Supply Channel for many consumers in the COVID-19 era. As more and more retail companies look to expand their online presence, AMZN is in an excellent position to grow both its retail business and its AWS cloud services segment. Amazon Prime members benefit from what is arguably the best execution infrastructure, including Prime shipping and extended digital content. Net sales could easily grow 30% this year while gross margin could reach 40%.
Given the current macroeconomic environment, one could argue one way or the other on valuation. Compared to Tesla, Amazon looks cheap. Compared to Apple, you could say that Amazon is overvalued. Either way, and with or without a stock split, Amazon is poised to continue to grow for many years to come. But a stock split could give stocks a significant boost – much like the split announcement did for Tesla and Apple, both before – and after – the split.
Disclosure: I am / we are long AMZN, GOOG. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose action is mentioned in this article.
Additional Disclosure: I am an engineer, not CFA. The information and data presented in this article have been obtained from company documents and / or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.