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What the stock split means for Amazon shareholders

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The world’s second most valuable internet company did it: Last week, Amazon announced a stock split for the first time in 23 years. While the stock reallocation doesn’t change anything fundamentally, the announcement could still change something psychologically for those who are interested.

Amazon’s business is booming, especially in the Corona crisis (Photo: © Amazon)

Andy Jassy doesn’t have it easy either. The announcement that Amazon shareholders had dreaded for years was about a year ago. Jeff Bezos, founder and CEO of the e-commerce giant who is now almost 28 years old, was set to step down as Amazon CEO in the third quarter of 2021. Indeed, the world’s second-richest man was in a hurry and vacated the post. armchair in the first week of July.

Since then, shares of the second-most valuable Internet company in alphabetical order have been on a steady downward trend. Since Jassy took office more than eight months ago, Amazon shares have lost 21 percent in value and 13 percent year-to-date, but even year-over-year the stock is down 5 percent.

Amazon shares trade at June 2020 levels

In other words, things are simply not going well for the successful internet group that has pampered its investors with generous returns since its IPO in 1997. True enough: If you had bought $1,000 worth of Amazon stock at the IPO 25 years ago, years, today you would be a millionaire of almost double dollars.

In the face of such steep growth, Amazon shareholders must have wondered at one point or another in the past two years if the best of all worlds is now behind the Internet pioneer. The stagnation can be seen in the development of the chart: Amazon shares are currently trading at $2,900, but prices of $2,671 were also seen last week; this is the lowest level since June 2020.

Andy Jassy announces a 20:1 file split

Clearly, underperformance has reached unacceptable levels for the 54-year-old Amazon CEO, as Jassy last week announced a 20-for-1 stock split and $10 billion share buyback. Measures to increase shareholder value are often described as “financial engineering” and have been applied by Carl Icahn at Apple for the past decade.

In 2013, the “Corporate Raider” suggested that Apple CEO Tim Cook should expand share buybacks and a stock split. Just a year after Icahn joined Apple, iGroup announced a stock split. Result: Apple shares rose about 50 percent in the first half of the year after the announcement. In the summer of 2020, Cook repeated the trick and was once again able to expect impressive price increases of 50 percent in a year and even 80 percent in a year and a half. After the same cosmetic prices, Tesla shares even increased fivefold in the same period.

Why do companies split their shares?

Nothing fundamentally changes: Although shareholders are allocated more shares, the value of the company and the price-earnings (P/E) ratio remain the same, as the price decreases accordingly. In the case of Amazon, shareholders are now allocated 19 new shares for one existing share. In return, Amazon’s stock price, currently trading around $2,900, then drops by a factor of 20, to $145.

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However, the optically cheaper price should, at least in theory, have a beneficial effect on the course. On the one hand, the lower price level allows small investors to start. Not everyone may be able to afford a share for just under $3,000, but things are quite different at $150; stocks have suddenly become affordable.

The Dow Factor: Amazon Could Soon Move Up to the Elite Index

On the other hand, the stock split has a psychological effect on small investors in particular: a small price of $150 looks more attractive and offers more opportunities relative to $3,000. An appreciation to $200 seems psychologically more achievable than a jump to $4,000, although both require a 25 percent price gain.

As a special factor, the rise in the Dow Jones stands out, to which Amazon has so far refused due to the high price of its shares, as well as its rival on the Internet, Alphabet, which announced its distribution of shares in the same proportion of 20:1 just under a month earlier. Because US_Eliteindex was priced by members and not according to the actual value of the company, the path was blocked for the two Internet giants. If, on the other hand, the shares are listed, the index funds must also buy the shares, often giving the stock a boost up front.

Investors reacted accordingly after Amazon’s stock split announcement last week and quickly sent the stock up six percent. The split will only take effect in just under three months: June 6.

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