Amazon Stock Price Drops, But That Doesn’t Mean They’re Cheaper

Amazon shares about to get cheaper 1:03 New York (CNN Business) — For many average investors, the price of a single Amazon share has been prohibitively expensive. There are many things a person can spend around $2,500 on instead of a small piece of “Prime” stock market. A good vacation? That home entertainment system? Season tickets for your favorite sports team? That’s about to change. Amazon (AMZN) launched what’s known as a stock split, which increases the number of outstanding shares a company has and also lowers its share price, making it more affordable for the average investor. The split, which went into effect Monday, will be a 20-for-1 transaction, meaning if you own one Amazon share, you’ll end up with 20 shares after the split, each costing about 1/20th of the stock. previous. price. So the value of your investment doesn’t change, and one Amazon share that traded for just under $2,450 would turn into 20 shares that cost just over $120 each. Why is Amazon doing this now? Companies with sky-high share prices often announce splits to make the shares appear more affordable to retail investors. Google and YouTube owner Alphabet (GOOGL), which is trading at a price of more than $2,300 and has a market capitalization of almost $1.5 trillion, has also approved a 20-to-1 split to take place in July. . Online retailer Shopify (SHOP) has a 10-for-1 stock split planned for the end of June, while meme-stock darling Tesla (TSLA) and GameStop (GME) have also proposed splitting their shares. But here’s the thing: Although a stock split may make a stock seem more affordable now, it doesn’t actually make the stock cheaper when looking at valuation measures like price-to-earnings or price-to-sales ratios. Amazon will still be worth around $1.3 trillion after the split occurs. The stock will continue to trade for more than 150 times its forecast earnings for this year and nearly 2.5 times its estimated sales for 2022, ratios that are significantly higher than the broader stock market as well as other retail industry leaders. such as Walmart (WMT) and Target (TGT). Many individual investors who wanted to own growth stocks like Amazon, Google, and Tesla were often forced to buy fractional shares (i.e. parts of a share) or get exposure to these companies through popular exchange-traded index funds like SPDR S&P. 500 ETF or Invesco QQQ ETF, which tracks the Nasdaq 100. That’s why making four-digit stock prices more accessible is a “smart move,” according to Michael Mullaney, director of global markets research at Boston Partners. . This should allow more investors to buy so-called round lots (100 shares) of a company rather than just a handful of shares. “Retail investor trading has increased dramatically over the last year and a half and has become very important again. It’s not just about the big institutions and hedge funds,” Mullaney said. “But it’s impossible for an average investor to buy 100 shares of some of these stocks at these prices.” Professional investors have also taken notice. Amazon shares are up almost 6% last week, as some traders may be looking to buy before the split takes effect. (Amazon is still more than 25% down this year.) The Amazon and Alphabet stock splits could also serve another purpose: They may increase the chances of both companies eventually being added to the Dow. That prestigious group of 30 leading US companies is a price-weighted index rather than a market capitalization-weighted index. Therefore, at their current share price, Amazon and Alphabet could not be added to the Dow without having a huge impact on the daily movements of the index. UnitedHealth (UNH), trading at just under $500 a share, currently has the largest weighting in the Dow, followed by Goldman Sachs (GS) and Home Depot (HD), which are each trading at over $300. Its high stock price was one of the main reasons Apple (AAPL) wasn’t added to the Dow until 2015, several months after a stock split pushed its triple-digit price below $100. per action. So the looming splits in Amazon and Alphabet could pave the way for those tech titans to join Apple and Microsoft, the only two companies in the US with a higher market value than Amazon and Alphabet, in the US. Dow-Jones.