Investors welcomed Thursday when Amazon (0.53% AMZN) announced a 20-to-1 stock split.
Investors have long wondered if Amazon, whose share price is currently around $3,000, will finally split its shares, especially after high-profile tech stocks like an Apple, Teslaas well as Alphabet everyone did the same. Amazon hasn’t had a stock split since 1999, during the turbulent days of the dot-com boom. In 23 years, the price per share will fall to about $150.
The stock split, which is scheduled for June 6, will not change the value of the shares in any way – the shares will simply be split into smaller parts. While some investors see the stock split as a milestone, it doesn’t change anything in the valuation or fundamentals of the business.
Image Source: Amazon.
However, Amazon’s stock split achieves two goals. First, it makes individual stocks more accessible, which can encourage more buying among retail investors and even help employees buy stocks. Second, it potentially gives the stock the right to join Dow Jones industrial index, an exclusive group of 30 blue-chip stocks that has been a shorthand for the overall stock market for over 100 years. Because the Dow is price-weighted, it cannot include stocks trading at thousands of dollars per share—that would skew the index too much. But if the price of a single Amazon share was $150, that would line up well with other Dow stocks like Apple. walmartas well as Walt Disney.
Along with the share split announcement, the company said it would authorize a $10 billion share buyback, also an unusual move. This will be the company’s first deal since a $5 billion buyback authorization in 2016, of which it used just $2.12 billion.
Why is it important
Together, the stock split and share buyback authorization signal a new stance for Amazon that could be more shareholder friendly and return capital to its investors. Although the $10 billion buyback amount is less than 1% of the company’s market capitalization, it also indicates that management believes the shares are cheap enough that a buyback is a good use of capital.
Founder and longtime CEO Jeff Bezos is known to have built the company with a long-term vision in mind and has often touted that strategy. In his first shareholder letter in 1997, Bezos emphasized the importance of long-term thinking, which included focusing on long-term market leadership over short-term profitability or Wall Street satisfaction.
Unlike most CEOs, Bezos did not participate in the company’s quarterly earnings reports, indicating that he does not see them as an efficient use of his time and that he does not care about Wall Street’s reaction to quarterly reports.
Who is Andy Jaycee?
While Bezos remains chairman of the board, he is no longer the CEO. Last July, he stepped down to devote himself to other projects, such as his space company Blue Origin. He was replaced by Andy Jassi, former head of Amazon Web Services, the cloud infrastructure division.
While Bezos has built an incredible personality by building Amazon, Jassi has kept a low profile since taking the reins. He did not participate in earnings calls, remained silent on social media, and gave only a few press interviews. It is not yet clear what Yassi’s management philosophy and strategy is and whether they differ from Bezos’s.
So the stock split and buyback announcement are Yassy’s first major departures from Bezos’ overarching philosophy. They also signal that the company has changed dramatically from when it was investing all of its profits into growth.
Amazon has become a profit machine with $25 billion in operating income in 2021, but the business also appears to be moving towards maturity. The company is the second largest in the world by revenue behind Walmart; the law of large numbers means that growing at the breakneck pace that investors are accustomed to is becoming increasingly difficult. After last year’s $470 billion in revenue, the company would have to add $94 billion in new sales to grow 20%. It won’t be easy.
In other words, share splits and share buybacks mean that Jassi may be more inclined to resort to traditional actions to create shareholder value, which may even include future dividends. There are also signs that Jassy is winding down some of the company’s experiments by closing its physical bookstores, 4-star stores and mall pop-ups.
It’s still too early to talk about Jassy’s overall strategy, but the Jassy era may be less about experimentation and more about doubling down on the company’s strengths, which are many. This formula worked well for Apple’s Tim Cook, who introduced dividends and buybacks after co-founder Steve Jobs refused to do any of that for a long time.
Judging by the reaction of the market on Thursday, stock splits and buybacks look like winning moves.
This article represents the opinion of the author, who may disagree with the “official” recommender position of premium consulting service Motley Fool. We are colorful! Questioning an investment thesis — even one’s own — helps us all be critical about investing and make decisions that help us become smarter, happier, and richer.