The conventional wisdom is that when a stock price increases too much, small investors can't afford to buy. Companies can easily solve this problem, though, by conducting a stock split. The share price becomes affordable again. Small investors will then buy in droves, serving as a nice catalyst.
However, reality doesn't always follow the conventional wisdom. Amazon (NASDAQ: AMZN) conducted a 20-for-1 stock split in early June. Afterward, the formerly high-priced stock was easily affordable for small investors. But there was no catalyst. Amazon stock actually sank instead of soaring after its stock split.
Fast-forward to today. Shares of the e-commerce and cloud giant have skyrocketed close to 30% over the past four weeks. Is Amazon's stock split starting to pay off?
A missing ingredient in June
One important thing to understand about stock splits is that they don't occur in a vacuum. Sure, splits make stocks more affordable. However, there are other factors that impact whether or not investors will start buying in heavy volumes.
There was a key missing ingredient for Amazon when the company conducted its stock split in June. Many small investors didn't have the motivation to buy.
Amazon's quarterly update in April disappointed Wall Street. The company reported excess capacity in its fulfillment and transportation network that it expected to affect costs for several quarters to come.
Negative perceptions can last for a while unless something quickly happens to change them. Some thought that Amazon's 20-for-1 stock split would do the trick. However, the split by itself wasn't enough to turn things around for the stock. Small investors still needed a compelling reason to buy shares of Amazon.
Recipe for a rebound
Amazon began providing some compelling reasons to buy the stock in July, though. For one thing, the company reported a record-setting Prime Day. Across the world, customers bought on average more than 100,000 items per minute during the two-day event.
Speaking of Amazon Prime, Amazon also made the service more attractive than ever to customers by teaming up with Grubhub. Under the deal, Prime members can sign up for a free one-year membership to the free unlimited restaurant delivery service Grubhub+. In addition, Amazon received warrants to buy 2% of Grubhub -- something that investors liked.
Amazon also announced plans to acquire One Medical for $3.9 billion. The purchase of the primary care provider signals a major move by Amazon to further expand into healthcare.
Most importantly, though, Amazon reported stellar Q2 results in July. The company handily topped Wall Street expectations. Amazon Web Services especially stood out, with the cloud-hosting unit delivering 33% year-over-year revenue growth. Amazon even provided a bullish outlook for Q3 2022.
Unsolved mystery
Would Amazon's shares have taken off with all of this good news in July even if the company hadn't conducted a stock split? Yes. Would the rebound have been as big were it not for the stock split? That will likely remain an unsolved mystery.
There's no way to know for sure how much Amazon's bounce would've been if its share price was still well above $2,000. It's possible that the resurgence in recent weeks would have been more muted. On the other hand, Amazon's sky-high share price hasn't seemed to hurt the stock's performance in the past.
Perhaps the best answer is that at least some part of the current momentum for Amazon is due to its lower share price. Some investors are likely now buying the stock who wouldn't have done so when Amazon's share price was at a nosebleed level. Maybe, just maybe, Amazon's stock split is now really beginning to pay off.
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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. Keith Speights has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
