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1 Good Reason Amazon’s 1:20 Stock Split Matters

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Amazon Stock

Important points

  • The stock split and buyback may signal the next era for Amazon and its new CEO.

  • They allow a reorientation of communication between management and investors.

  • Amazon could also use it to signal that cash flow priorities will change in the future.

Technically, a stock split does not change the value of a company or its shares. A common argument for stock splits is that a lower share price gives more retail investors access to the stock. But with many brokers now offering fractional shares, even that is no longer a real problem.

It’s probably true that a stock split is a vote of confidence from management. A company is unlikely to go through a stock split unless its short-term business prospects are strong. But there may also be an advantage that is not so often talked about. and Amazon (NASDAQ:RNP:906866 -0.88%) may be the recipe for success with its recent announcement of a 1:20 stock split Apple follow, continue.

A sign of a new era.

Andy Jassey took over as CEO at Amazon from legendary founder Jeff Bezos in July 2021. While the move came under different circumstances, it reminded another tech titan that it had a new CEO following in its founder’s footsteps. Tim Cook took over as Apple’s CEO in August 2011, at a time when the company was in full swing. The iPhone 4S was released in 2011 and included the new Siri voice assistant and improved camera technology.

Sales soared, and Apple investors responded by driving the stock to a division-adjusted high of around $700 per share for the fall of 2012. However, the products were developed under the direction of the late Steve Jobs, and Tim Cook faced criticism when Apple shares plummeted more than 40%.

But a year later, the company conducted a 7-for-1 stock split. The Tim Cook era was now in full swing and investors have enjoyed wildly successful stock returns ever since, as the chart shows.

Apple. YCharts Data

Why is it important to Amazon?

As Apple shares plunged under Tim Cook’s early leadership, investors wondered when, if ever, he could push the stock back to its previous high of $700 a share. Similarly, Amazon shares hit an all-time high of over $3,700 per share in the same month that Andy Jassey took the helm.

With the stock now 20% below that level, this stock split will reset Jassey and how investors view his tenure relative to the stock price. He no longer has to listen to investors presenting him with a $3,700 share price that he must beat. This helps you manage communication with investors and gives you a fresh perspective.

A change could be imminent

Along with the stock split, Amazon announced that its board of directors has authorized up to $10 billion in buybacks of common stock. One of Amazon’s big cash-producing divisions is Amazon Web Services (AWS), which Andy Jassey ran before his promotion to CEO.

Amazon Cash from Operations (Quarterly). YCharts Data

The company has used much of that cash to invest in various aspects of its business, mainly in areas related to logistics, such as distribution centers and fleets of planes and trucks for transportation. The share buyback announcement may indicate that these investments are winding down, allowing more working capital to flow to investors.

While it’s true that a stock split, by itself, won’t change the fundamentals of the business, Amazon’s announced stock split could be of greater concern to investors. At a minimum, it offers a fresh start for a new CEO who has big shoes to fill. The same situation has paid off in the long run for Apple investors.

Amazon’s 1 Good Reason Why 1:20 Stock Split Matters article first appeared in The Motley Fool Germany.

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This article represents the author’s opinion, which may differ from the “official” recommendation position of a premium Motley Fool advisory service. Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. This article was written by Howard Smith and published on Fool.com on 03/12/2022. It has been translated so that our German readers can join the discussion.

The Motley Fool owns stock and recommends Amazon and Apple. The Motley Fool recommends the following options: $120 long calls in March 2023 at Apple and $130 short calls in March 2023 at Apple.

Motley Fool Germany 2022

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