For full text search please use the '?' prefix. e.g. ? Onboarding

Reading 2022-03-28

Metadata

Notes from reading

Amazon announced that it’s rolling out a 20-for-1 stock split, which will hopefully be arriving sometime in June between 7am and 9pm.

Amazon will be splitting each of its shares into 20, meaning every investor who owns a share in Amazon will receive 19 more come June. It’s also planning to buy back $10 billion worth of its own shares – a move that’ll reduce their supply significantly and push up the price of those left over

One key reason Amazon might’ve opted to split its stock is because the decision could pave the way for its inclusion in the Dow Jones Industrial Average.

  • The Dow is a US stock index that employs an antiquated weighting method whereby a company’s size in the index is dictated by its absolute share price rather than its overall market value, which means it tends to avoid expensive stocks that would have an outsized influence on its price
  • But if Amazon slashes its stock, it’s more likely to be added to the Dow’s roster
  • That matters: investors plow billions of dollars into passive investment funds that track the index, so they’d be obliged to buy in and push Amazon’s stock even higher

For retail investor, this isn’t exactly revolutionary. Plenty of investment platforms offer fractional investing, after all, so you’ve been able to buy into eye-wateringly expensive companies for a few years now.

Such splits used to be common, with as many as 47 at S&P 500 companies in 2006 and 2007. Apple and Tesla brought stock splits back to investor attention in 2020, followed by Nvidia in 2021. Alphabet, the parent company of Google, announced a 20-for-1 stock split in 2022.

Nothing about a stock split fundamentally alters the financial underpinnings of a company’s stock, but shares in tech giants like Apple, Nvidia, and Tesla have up 81%, 65% and 300% (respectively in previous order) since their share-split announcement.

apple-stock-split

nvidia-stock-split

tesla-stock-split

So what else is going on here?

  • a share split is in many ways the ultimate sign of management confidence – misplaced or otherwise
  • only successful firms that have posted impressive stock price growth even need to consider splitting their shares. And managers will only go through the hassle if they think their company’s stock will keep growing in future. No company wants to face the ignominy of finding their stock price too low, forcing a share consolidation (a.k.a. a reverse split)