Will Amazon's Stock Split Kickstart the Stock? – The Motley Fool

Will Amazon's Stock Split Kickstart the Stock? – The Motley Fool

Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
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Amazon‘s (AMZN 2.57%) stock has had a rough second quarter. Since April 1, the stock has tumbled more than 30% and now sits 42% off its all-time high. While its e-commerce business is seeing some pressures from consumer shopping habits returning to normal, is it that much worse?
Furthermore, should Amazon’s shareholders vote in favor of the impending stock split at the shareholder’s meeting on May 25, Amazon’s stock will split 20 for one. This split would drop the current price from around $2,200 to around $110 per share. While primarily a cosmetic move, it could open the door to Amazon’s inclusion in the Dow Jones Industrial index and open the door to stock ownership for those without access to fractional shares. Will this be the boost Amazon’s stock needs to return to its previous highs? Or is it just smoke and mirrors for a struggling business?
Image source: Getty Images.
While news of a stock split can often send stocks soaring, returns after the split are mixed. Schaffer’s Research found for 240 stock splits after 2010, the average six-month return was 5.25% versus the 4.39% the S&P 500 returned. Their research didn’t span out past that, but it makes sense that stock split stocks may do well further beyond that. Companies usually decide to split their stock due to massive stock price appreciation.
This growth comes from one catalyst over the long term: business performance. Great businesses have great stock returns, making them strong candidates for stock splits and thus higher returns after the split.
Another consideration is a possible Dow Jones index addition. Because the Dow Jones is price weighted, it can be thrown off by stocks with high prices. Currently, the index’s most “expensive” stock is United Health at $480, and Amazon’s $2,000-plus stock price would upset the index’s balance. Post stock split would be around $110, close to the bottom third.
Since this century started, there have been 18 modifications to which companies make up the index. Because of this, it’s hard to isolate business performance versus index addition gains with a small sample size. However, the S&P 500 has added 538 companies since 2000, allowing researchers to understand better if adding a company to an index provides a short-term boost.
They found almost no effect of a company joining the index for companies added after 2011. Besides a one-time boost that may come from the news of being inducted into this prestigious index, Amazon’s stock won’t see a huge effect if the Dow selects it as a new addition (although there are no plans to include the stock at this time).
Image source: Amazon.
With these two stock drivers mostly neutralized, can Amazon’s business turn it around and provide solid results?
In its first-quarter report, Amazon told two tales. First was its struggling e-commerce business. After tremendous growth in 2020 and 2021, Amazon is coming against tough comparisons. As a result, sales were only up 8% YOY (year over year) in North America and were down 6% internationally. Even worse was its operating income in these segments, down 145% YOY (North America) and 202% (international). As a result, both segments lost money, causing profits to plummet. 
Brian Olsavsky, Amazon’s CFO, cited inflation and overstaffing at warehouses as two causes of this profitability decline. However, he sees some of those headwinds subsiding in Q2, which is a great sign for investors.
Second, Amazon Web Services (AWS) was still performing at the top of its game. Operating income grew 57% YOY, outpacing revenue growth of 37% for this division. However, this wasn’t enough to make it profitable across the whole company, as Amazon still lost $3.8 billion in Q1.
Image source: Getty Images.
While these results weren’t the greatest overall, is the stock too cheap to ignore?
Take AWS as a sole entity. It pulled in $67.1 billion over the past twelve months with a 31% operating margin. For context, Adobe has $16.1 billion in trailing twelve months (TTM) sales, a 37% operating margin, and a market cap of $188 billion. If you multiplied Adobe’s market cap by four (because AWS brings in about four times as much revenue), AWS has a hypothetical market cap of $752 billion if it’s valued the same as Adobe.
At Amazon’s current $1.1 trillion market cap, the e-commerce business is only worth $348 billion once AWS is subtracted from the overall market cap. In 2021, Amazon’s global e-commerce business had $407 billion in sales. Therefore, Amazon’s e-commerce price-to-sales ratio is 0.85, similar to Target at 0.72.
Using these numbers, Amazon’s stock is reasonably priced. That means any business growth it experiences should translate into a higher stock price, but with the current market outlook, that could be some time.
If Amazon can get its staffing issues under control and continue growing its AWS business, Amazon’s stock could be a fantastic buy at this price point. However, Amazon may have a difficult period ahead with the consumer weakening. Still, if examining Amazon’s stock from a three- to five-year holding standpoint, investors can find great value in Amazon.

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