The Biggest Reason to Buy Amazon Has Nothing to Do With the Stock Split – The Motley Fool


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E-commerce giant Amazon ( AMZN -2.55% ) recently announced its first stock split since 1999, and shares are up 18% since the news. But while investors always seem to love stock splits, they aren’t nearly as impactful for shareholders as you might think.
Instead, consider looking beyond the stock split to focus on Amazon’s $10 billion share repurchase program. This could drive far more value for investors than the split itself. Let’s look closer.
Amazon announced a 20-for-1 stock split, which means that if you own one share of stock, you will have 20 shares after the split. The share price (currently about $3,300) will also be split, so those 20 shares will have a share price of roughly $165 each. Stock splits can be good for investors because whole shares of stock become more affordable. Many investors don’t have enough capital to buy many $3,300 shares at a time, but $165 is much more affordable.
Image source: Getty Images.
However, it’s essential to clarify that the lower share price doesn’t mean that the stock’s valuation is any cheaper. Stock splits create more shares but make each share have less value in the process. Suppose you take a pie and cut it twice, creating four slices. If you cut that pie two more times, you now have eight smaller pieces; the pie itself didn’t get any bigger. That’s precisely how stock splits work.
Investors love stock splits because the lower share prices they create can make shares easier to afford, sometimes boosting demand for the stock. But investors need to remember that the split doesn’t make the company any more valuable.
Instead, investors should be looking at Amazon’s announcement of a $10 billion share repurchase program. A company can take shares of stock off the market by buying them, which helps investors because it leaves fewer “slices” of the pie, making them worth more. Share repurchases increase per-share financials like earnings per share (EPS), which can help drive the share price higher.
Amazon’s share repurchases may be more symbolic than anything; buying back $10 billion of stock for a company worth $1.7 trillion isn’t going to matter a lot. However, it’s a sign that Amazon’s business could be maturing to the point that it can begin distributing some of its profits to shareholders instead of reinvesting all of its cash back into the company. If that’s the case, investors could see more money flowing into their pockets in the future, potentially through additional repurchases.
It would have been ideal to buy Amazon before it went up almost 20%, but the stock was coming from a severely depressed valuation, trading at a price-to-sales ratio that it’s touched rarely over the past five years. I think the stock is still priced reasonably well today for long-term investors.
AMZN PS Ratio Chart
AMZN PS Ratio data by YCharts
Amazon is known by most for its e-commerce business, but Amazon Web Services (AWS) could drive the most shareholder value in the years ahead. The segment grew 40% year over year in the company’s 2021 Q4 and is responsible for all of Amazon’s Q4 operating profits. If AWS can keep growing at a steady rate, it should increase Amazon’s earnings across the board as it contributes more to the business. AWS currently accounts for just 13% of the company’s total revenue.
Eventually, a more profitable Amazon that benefits more directly from AWS could support a higher valuation for the stock. The e-commerce business isn’t going anywhere, but it’s highly competitive, requiring vast revenue to return much profit. Share repurchases could help complement Amazon’s EPS growth, so shareholders should welcome the company’s decision to begin such a program.

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