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Amazon’s Stock Split Shouldn’t Change Anything – But Will It?

Tim Worstall
Tim Worstall trader
Updated 10 Mar 2022

Buy Amazon Shares Your Capital Is At Risk

Key points:

  • A stock split shouldn’t change the value of a company at all
  • Yet if this is true then why would there be an Amazon stock split?
  • The truth is markets don’t work according to theory
  • What is Amazon’s CSR Policy? (NASDAQ: AMZN) stock has risen near 10% on the announcement of a stock split and a stock repurchase programme. One of these two should have no influence on the value of Amazon stock as a whole, the other probably should. But the actual influence on the Amazon enterprise value is almost certainly inverted – the thing that shouldn’t have the effect is and vice versa.

Amazon has announced both a stock split – 20 for one – and a stock repurchase programme worth $10 billion or so. Repurchasing shares should move the price up as it means the same company is now owned by fewer pieces of stock. This is though unlikely to have all that much effect. $10 billion is not a great deal of the $1.4 trillion market cap at Amazon. Buying in 0.7% of the stock over several years should, in theory, move the price by 0.7%. Which really isn’t all that much at all.

In reality, this isn’t even an attempt to seriously reduce the amount of Amazon stock in issue. This is much more about the normal treasury operations to provide stock for maturing options and stock grant programmes. It’s management of how the staff are being paid – partially in stock – rather than a significant attempt to reduce stock issuance.

Also Read: Five Best Starter Stocks For Beginners

The other plan, the stock split, this should, in theory, have no influence at all upon the Amazon stock price. And yet it will because markets aren’t entirely rational. This is because us, we people, are not entirely rational.

Just to illustrate the math, 1,000 shares at $1 are equal to one piece of stock at $1,000. But that’s just not the way it works out. American investors tend to – tend to – value stock more highly if the share price is in the $10 to $100 range. There’s a certain cultural conditioning that this is about the right range for a stock price. Below that and it’s getting “cheap” like a penny stock, above and it’s “expensive”. It’s not wholly rational but there it is.

We also know this is a cultural thing because the same range on the London market is £1 to £10. This is why ADRs of London stock are normally 10 shares each, to fit those cultural prejudices either side of The Pond.

This shouldn’t be true but it is. When a stock climbs up to the $2,700 and above level, as Amazon’s has, then it can be value additive to have that stock split – as Amazon has just announced.

Note that this is entirely different from those reverse stock splits we see at the bottom end of the market, where companies announced that 20 old stock will become 1 new. That’s about pushing the quote up above $1 so as to not lose the NASDAQ listing – entirely different from the Amazon case here.
Just one of those odd things. Amazon’s stock buyback should alter the value of Amazon as a whole but it won’t, not enough so anyone would notice. Amazon’s stock split should have no effect on Amazon’s market capitalisation but it probably will.

We as traders need to move in markets as they actually are, not as theory says they should be.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.