Calling for an AMZN Stock Split in 2017
Fifty, just 50 bucks! As of May Day 2017, that’s how short Jeff Bezos is from beating Bill Gates to become the world’s richest man.
Confused? Well, Amazon.com, Inc. (NASDAQ:AMZN) stock has to advance by roughly $50.00 to cross the $1,000 mark.
Once it does, Amazon CEO Bezos’s net worth could surpass that of Microsoft Corporation’s Bill Gates. Likewise, investors who invested as little as $5,000 in AMZN stock at its initial public offering (IPO) will see that figure turn into an astounding $416,000! But those of us who missed the boat earlier deserve a second chance at Amazon stock, don’t we? This is why I’m proposing an Amazon stock split in 2017.
And why not? Amazon already has a history of the more common 2-for-1 and 3-for-1 stock splits. But this time around, I’m calling for a rare 10-for-1 split. Seems too outlandish? That’s how we felt when I first heard of Apple Inc.’s (NASDAQ:AAPL) 7-for-1 split back in 2014—yes, seven shares in exchange for one share! A year later, Netflix, Inc. (NASDAQ:NFLX) followed in Apple’s footsteps with a 7-for-1 split of Netflix stock. So, my friends, it may seem odd at first, but that’s how precedents are set.
But why specifically 10-for-1, you ask? That’s because a $1,000 stock is too expensive for average retail investors. Just think about it: if you are starting off with a modest investment of $2,000, one AMZN stock alone will take up 50% of your portfolio. In other words, you’ll be risking half of your investment on one stock. That beats the purpose of having a portfolio.
But, if the stock only costs you $100.00, one stock would only account for five percent of your portfolio. Now that’s a reasonable weight for one security in a diversified portfolio. Make sense?
This is why I’m all for a 10-for-1 split of Amazon stock, with each share ending up being worth only $100.00, which is much more affordable for average retail investors, like you and me.
Wait, did all this commentary on stock splits go over your head? Worry not! Here’s a quick refresher from Finance 101.
Take a scale, and put a pound of feathers on one side and a pound of gold on the other. Now tell me, which way would the scale tip? No, I’m serious, and this is relevant. You’ll soon see why.
The answer to the question, by the way, is that the scale wouldn’t tip either way. It stays balanced because a pound of anything weighs just that: a pound!
Coming back to stock splits, the phrase is self-explanatory. Companies use stock splits to split their outstanding stock into two, three, or whatever times their total number. For instance, let’s say a company does a 2-for-1 split. So, for each of its outstanding shares, the company issues one additional share. In other words, the total outstanding stock doubles.
Now, say you own 20 AMZN stock shares and Amazon does a 10-for-1 split. So, for every AMZN share that you own, you get 10 new shares, for a total of 200 Amazon shares (20 × 10=200). Easy-peasy?
But wouldn’t that affect your stake in the company or, for that matter, your portfolio? No, not in the literal sense. That’s because the price of the stock goes down by an inverse of the same ratio. So for a 2-for-1 split, you get two shares for one, but the price of each share is now halved.
Again, let’s say you had 20 Amazon stock shares for $1,000 each. After a 10-for-1 split, you now have 200 AMZN shares, but the price of each is now $100.00 ($1,000 ÷ 10). So, the value of your investment stays at $20,000 both before and after the split. In other words, a pound of feathers and a pound of gold weigh the same. Geddit?
Will Amazon Stock Split in 2017?
I don’t know that for sure yet, but it should! Nothing is official yet, but much speculation is already making rounds. Word on the street is that Amazon might consider a stock split now more than ever, because the stock price is so inflated.
But a high stock price is good news for Amazon, isn’t it? Well, for the most part, yes! But when the stock price is so high, only a small segment of the investor community can afford to buy the stock. In most cases, it’s the institutional investors rather than individual investors.
And when a stock has significant institutional ownership, the stock can get volatile. Allow me to explain. Institutions and high-net-worth investors buy and sell stocks in bulk. So, when institutions start dumping a stock, let’s say on the back of momentary bad news, the stock can crash and burn in the blink of an eye.
One such example that comes to mind is Chipotle Mexican Grill, Inc. (NYSE:CMG), a stock with extremely high institutional stakes. When news of an E. coli outbreak first broke out, the stock took a nosedive, and it hasn’t recovered. Billions of dollars were wiped off its market cap in a matter of days.
Now, Amazon’s institutional ownership is significant. Nearly two-thirds of the stock is held by institutions. In order to dilute institutional control and get more retail investors on board, Bezos has an incentive to go for an Amazon stock split in 2017.
Like I said before, it won’t be the first time. Amazon has split its stock at least three times in the past. In fact, the company went public in 1997, and all three splits occurred within two years after the IPO.
Amazon Stock Split History
Stock Split Date
Stock Split Ratio
June 2, 1998
January 5, 1999
|September 2, 1999|
Take special note of the timing of these splits. This was the time when stock prices were rapidly inflating into what later came to be known as the “dotcom bubble.”
Why Amazon Should Split Its Stock
The first reason why Amazon should split its stock is obvious. Stock splits add to the liquidity of the stock. Like I said earlier, splitting the stock will lower its price to the point where average retail investors will be able to buy it, thus adding to its liquidity. This will, likewise, lessen the undue control of Wall Street’s institutional investors and money managers over AMZN stock.
Second, as more investors jump on board, they’ll push the stock price back up. That’s because stock splits usually reinvigorate investor optimism that the stock has the ability to once again hit pre-split highs. So we can safely assume that a price higher than the pre-split equivalent price may be reached, which bodes well for Amazon stock holders.
Finally, prices are once again inflated to the point where many are fearing a tech bubble in 2017. Just like the last three splits prior to the dotcom bubble, the time is again ripe for an AMZN stock split.
Amazon Stock Prediction 2017
Split or no split, AMZN stock is a solid growth play that keeps on rewarding its investors. Just look at the Amazon stock chart below. The stock performance is mind-blowing, making steady strides straight to the moon!
Chart courtesy of StockCharts.com
But it doesn’t stop there. From where I see it, Amazon is just warming up. I see further potential in the stock. This will come from two growth avenues.
First is “Amazon Web Services” (AWS) which, being the biggest cloud computing service in world, is witnessing hyper growth and will continue to grow at a double-digit rate for at least the next five years.
The second is Amazon’s core e-commerce business, where a handful of new developments—including international expansions and a push for same-day delivery— bode well for AMZN stock.
I’m particularly bullish on Amazon’s latest acquisition of Souq.com, the biggest e-commerce web site in the Middle East, which will turn out to be a game changer for Amazon in the deep-pocketed markets such as Dubai, United Arab Emirates (UAE).
Then, same-day delivery initiatives like Amazon’s Uber-like trucking service, as well as Amazon-owned planes, drones, and ocean freight service all point to a self-sustained e-commerce behemoth in the making, which will be invincible to all forms of competition.
Long story short: not only am I seeing AMZN stock breaking the $1,000 barrier, I’m seeing it going up further. But, for average investors, making Amazon stock a meaningful part of their portfolios remains a dream, that is, until Bezos gives a green light on an Amazon stock split in 2017.