Following on the heels of stock split announcements from Tesla and Apple, Amazon is likely to be the next to do so.

Considering the current price of the stock, it would seem like a 10:1 stock split would be rational.

Although investors know that stock-splits don’t add value on a purely economic basis, one could argue they do provide a psychological lift.

Meantime, Amazon’s business keeps performing very well as COVID-19 proves to be a tailwind and AWS continues to grow at a rapid clip.

Following on the heels of high-profile stock split announcements from high-flyers like Tesla (TSLA) and Apple (AAPL), Amazon (AMZN) is likely to be the next big company to be a “splitter” as its stock is considerably higher than either Tesla or Apple was on a pre-split basis.

Investors know that a stock split doesn’t add value on an economic basis because the following are equivalent:

1 share @ $10

10 shares @ $1

Or, as someone recently said: “If you gave me five singles for a $5 bill, I’m no better off.”

However, one can argue that stock splits do provide a psychological lift and may, during the new Robinhood era, make a “cheaper” stock more accessible to small retail investors. One only needs to look at the action in the stock charts of Tesla and Apple to support that opinion:

Source: Yahoo Finance (notes in red by the author)

Tesla was trading at $1,374 on August 11, the day its 5:1 stock split was announced. According to my math, Tesla is now up ~74% since the announcement.

Apple was trading at $384 on July 30, the day its 4:1 stock split was announced. Apple has risen ~35% since the split announcement.

Currently trading at $3478/share, one could argue that Amazon is much more in need of a split as compared to either Tesla or Apple was. After all, Amazon has only split its stock three times, all back in the late 1990s:

Source: Yahoo Finance (notes in red by the author)

The previous splits were:

6/2/98 – 2:1
1/5/99 – 3:1
9/2/99 – 2:1

Surprisingly, Amazon hasn’t split the stock once in the 2000’s. As a result – as can be seen by the chart above – the average daily trading volume has receded as the stock price has dramatically risen.

I’ve checked the last four conference calls, and there has been no discussion of a split as far as I can see. While Amazon would seem to be a solid choice to add to the DJIA, as we saw from Apple’s stock split affect, high-priced stocks can cause a lot of turbulence to the DJIA. If Jeff Bezos has any desire to be in the DJIA, he’ll have to split the stock in order to get the price down to a level that can be more easily managed by the index.

Regardless of a split (or no-split), stock splits should not be an investment thesis for any company, and it isn’t for Amazon: it’s the fundamentals and financial performance that are the basis for investing in the company.

Highlights in Amazon’s most recent Q2 EPS report were:

Net sales increased 40% to $88.9 billion in Q2, compared with $63.4 billion in Q2 of 2019.
Operating cash flow increased 42% to $51.2 billion for the TTM period as compared to the prior year period.
Net income of $5.2 billion in Q2 ($10.30/share) almost doubled as compared with net income of $2.6 billion ($5.22/share) in Q2FY19.

Free-cash-flow jumped and at $31.85 billion in Q2 (+27.6% yoy) equates to an estimated $61.60/share based on 517 million outstanding shares on June 30, 2020:

Source: Q2 Presentation

As can be seen in the graphic above, Amazon’s cloud computing business (Amazon Web Services or AWS) continues to grow rapidly and added several new customers, including HSBC, IHS Markit, Formula 1 Racing, Bundesliga (Germany’s top football league), and Capella Space.

And Amazon keeps adapting and innovating. Forbes reports that Amazon has ordered a fleet of 1,800 Mercedes-Benz electric vans, part of its initiative to achieve its goal of carbon neutrality by 2040. Meantime, CNBC reports that Amazon has received approval from the Federal Aviation Administration (“FAA”) to operate its fleet of Prime Air delivery drones. The FAA said the approval will give Amazon the ability to “safely and efficiently deliver packages to customers.” Alphabet’s (GOOG) “Wings” and UPS (UPS) had previously won FAA approval for their drone delivery systems.

Amazon needs to keep evolving and adopting because Walmart (WMT) just announced its $98/year subscription “Plus” service to compete with Amazon Prime. But Prime has a significant lead: it’s a 15-year-old program that has over 150 million users and many more benefits – including the Prime Video library, Amazon Fresh grocery deliveries and no delivery minimum for many low-priced items. Consumers get all that for $119/year – only $21/year more than Walmart’s plus.

Summary & Conclusion

Amazon continues to evolve and has become a (the?) vital supply channel for many consumers in the age of COVID-19. As more retail businesses look to expand their online presence, AMZN is in an excellent position to grow both its retail marketplace business and its AWS cloud services segment. Amazon’s Prime members enjoy what is arguably the best fulfillment infrastructure including Prime shipping and expanded digital content. Net sales could easily grow 30% this year while gross margin could reach 40%.

Given the current macro environment, one could argue either way on valuation. As compared to Tesla, Amazon appears cheap. As compared to Apple, one could argue Amazon is overvalued. Regardless, and with or without a stock split, Amazon is poised to keep growing for many years to come. But a stock split could give shares a significant lift – just as the split announcement did for Tesla and Apple, both before – and after – the split.

Author: Michael Fitzsimmons

Source: Seeking Alpha: Amazon: May Split Soon

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