Amazon Announced a 20 to 1 Stock Split

Will Amazon (AMZN) finally get into the Dow 30?


Amazon announced a 20 to 1 stock split on Wednesday afternoon and the stock price shot up about 7% in after-hours trading. As every armchair Gordon Gekko likes to point out, splits create no value, therefore shouldn't, in theory, move the stock price.

The company also announced a 10-billion-dollar buyback program, doubling it from 5 billion, which should directly move the stock price. AMZN has underperformed this year relative to their reported earnings, this could very likely be the catalyst that moves the stock much higher.

You may think of Amazon as an e-commerce giant, and that is indeed where they make their most revenue, but their biggest profits come from Amazon Web Services (AWS). Their new CEO Andy Jassy is the founder of AWS, indicating the company’s commitment to AWS after Jeff Bezos’s departure as CEO.

With the stock splitting, its price will make it very likely that Amazon will be added to the Dow Jones Industrial Average. This is not insignificant because if that happens index funds and many mutual funds will have to begin buying the stock.

The stock split is significant. While some brokerages allow fractional shares, most retail investors simply do not bother buying a stock unless they can own several sharers. A high share price also prices out many options traders. Most importantly, a stock split signals to investors that management is absolutely certain the stock price deserves to go much higher. Simply put, stock splits matter, both materially and symbolically.