Amazon's Stock Split Eliminates This 1 Big Problem
Amazon (NASDAQ: AMZN) shares climbed 8% in one trading session this week after the company announced a 20-for-one stock split. That's like a breath of fresh air for investors. The retail giant's shares have struggled this year, dropping 11% so far. And that's after finishing last year with an increase of less than 3%.
If you're an Amazon shareholder, a stock split doesn't change much for you through the actual operation itself. For every one share you own, you'll have 19 more after the split. But the total value of your holding remains the same. Imagine a pie cut into slices. Whether you buy the pie uncut or cut into slices, its value doesn't change. But the planned stock split does change something for potential Amazon investors -- and this could lead to share gains down the road.
Image source: Getty Images.
A roadblock for certain investors
The problem with Amazon in recent years has been the high price of its stock. It's been a roadblock for certain individual investors who want to make a small initial investment. Amazon stock reached a high of more than $3,600 last year. It's since come down to the $2,800 range. Of course, there's the possibility of buying fractional shares. But not all brokerage firms offer them. And some investors prefer buying at least one full share or more of a company.
The stock split -- considering today's price -- will take the price of each share down to about $150. If shareholders approve the plan during the annual meeting in May, the split will happen in early June. So, the stock split opens the door to making investment in Amazon a little easier for a wide range of investors. As a result, more of them may buy shares of the retail giant.
That's great news for shareholders and potential shareholders. But the split itself isn't the reason to buy Amazon. That's just a little plus that may jump-start share performance in the coming months. Here's the reason to add Amazon to your portfolio for the long term: The strength of its e-commerce and cloud computing businesses.
Amazon has been growing annual revenue and net income for a number of years -- and both figures have reached well into the billions.
AMZN Net Income (Annual) data by YCharts
A leader in both businesses
The company is a leader in both of its businesses. First, let's look at retail. Amazon accounts for about 40% of total U.S. e-commerce sales, according to Insider Intelligence. And we can count on Amazon maintaining leadership thanks to growth in its subscription service, Prime. Various fast and free delivery options mean members are likely to favor ordering on Amazon versus anywhere else. In the fourth quarter, Amazon said it added "millions" of new Prime members worldwide.
As for cloud computing, Amazon Web Services (AWS) has continued to maintain a 32% to 33% share of the market over the past four years, according to Synergy Research Group. The closest rival is Microsoft, with a 21% share. AWS has picked up major contracts in recent months -- such as a deal to support Nasdaq's markets. This is part of Nasdaq's plan to become the first complete cloud-based exchange.
So the future looks bright for AWS. And this is important for Amazon, since AWS is a key profit driver. Last year, AWS represented 74% of Amazon's total operating income.
None of Amazon's fundamentals change because of the stock split. But as I mentioned above, the split opens the door to more potential investors. Instead of brushing off the stock as too expensive, they may now take time to consider Amazon's current growth and future prospects. And more and more investors flocking to Amazon mean the stock's doldrums soon may be over -- and it could be back on the road to unstoppable growth.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino owns Amazon. The Motley Fool owns and recommends Amazon and Microsoft. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
