Amazon’s stock price should drop, but that won’t make it cheaper

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For many average investors, the price of a single Amazon stock has been prohibitive. There are a lot of things a person can spend around $2,500 on instead of a small chunk of “Prime” stock market real estate. Great vacation ? That home entertainment system? Subscriptions for your favorite sports team?

That’s about to change.

Amazon (AMZN) conducts what is called a stock split, which increases the number of outstanding shares of a company and also reduces its stock price, making it more affordable for the average investor .

The split, which takes effect Monday, will be a 20-to-1 trade, meaning that if you owned one stock of Amazon, you would end up with 20 shares after the split that will each cost about 1/20th of the previous price. . So the value of your investment doesn’t change, and an Amazon stock that traded for just under $2,450 would become 20 shares that each cost just over $120.

Why is Amazon doing this now? Companies with very high stock prices often announce splits in order to make the shares more affordable for retail investors. Google and YouTube owner Alphabet (GOOGL), which trades at a price of over $2,300 and has a market capitalization of nearly $1.5 trillion, also approved a 20-1 split that will take place in July.

Online retailer Shopify (SHOP) has planned a 10-for-1 stock split later in June, while Tesla (TSLA) and stock meme darling GameStop (GME) have also offered to split their shares.

But here’s the thing: even though a stock split can make it seem Because a stock is now more affordable, it doesn’t make the stock any cheaper when looking at valuation metrics such as price-to-earnings or price-to-sales ratios.

Amazon will still be worth around $1.3 trillion after the split. The stock will still trade at more than 150 times earnings forecasts for this year and nearly 2.5 times its estimated sales for 2022 – ratios significantly higher than the broader stock market as well as other leaders. retail sector such as Walmart (WMT) and Target (TGT).

Many individual investors who wanted to hold growth stocks like Amazon, Google and Tesla were often forced to buy fractional shares (i.e. parts of a stock) or exposure to these companies through popular index-traded funds like the SPDR S&P 500 ETF or Invesco QQQ ETF, which tracks the Nasdaq 100.

That’s why making four-digit stock prices more accessible is a “smart move,” according to Michael Mullaney, director of global markets research for Boston Partners. This should allow more investors to buy so-called round lots (100 shares) of a company instead of just a handful of shares.

“The retail investor trade has grown significantly over the past year and a half and is once again very important. It’s not just big institutions and hedge funds,” Mullaney said. “But it’s impossible for an average investor to buy 100 shares of some of these stocks at these prices.”

Professional investors have also taken notice. Amazon’s stock rose nearly 6% last week as some traders may look to buy before the split takes effect. (Amazon is still down more than 25% this year.)

Stock splits for Amazon and Alphabet could also serve another purpose: it could increase the chances that the two companies will eventually be added to the Dow Jones.

This prestigious group of 30 leading US companies is a price-weighted index instead of a market capitalization-weighted index. Thus, at their current share price, Amazon and Alphabet could not be added to the Dow Jones without having an outsized impact on the daily movements of the index.

UnitedHealth (UNH), which trades at just under $500 per share, currently has the largest weighting in the Dow, followed by Goldman Sachs (GS) and Home Depot (HD), which each trade for more than $300. dollars.

Its high stock price was a key reason Apple (AAPL) was only added to the Dow in 2015, months after a stock split boosted its price into triple digits. raised to less than $100 per share.

So the impending splits of Amazon and Alphabet could pave the way for these tech titans to join Apple and Microsoft, the only two companies in the United States with a higher market value than Amazon and Alphabet. , in the Dow Jones.

Big tech stocks aren’t the only ones with inflated prices. Consumers and businesses have faced rising prices for commodities and services for most of the past year. Investors will see how much prices have risen again when the US government releases its latest consumer price index (CPI) figures on Friday.

Prices rose 8.3% in the past 12 months ending in April. But the increase, while still stubbornly high, was the first drop in year-over-year consumer inflation since August. Consumer prices rose 8.5% in the 12 months to March. Economists therefore hope that the level of price increases will continue to decline over the coming months.

Even so, it may take some time for consumer prices to reach a more comfortable level for buyers…and the Fed. Ideally, the Fed would like to see the CPI slow to around 3% to 3.5% or even lower before declaring victory against inflation.

“The good news is that the inflation numbers should start to come down,” said Ken Shinoda, portfolio manager at DoubleLine. “The question is will they go down enough?”

Monday: Amazon stock split. Apple’s Worldwide Developers Conference begins.

Tuesday: Gains from United Natural Foods (UNFI), Smucker (SJM) and Casey’s General (CASY)

Wednesday: Earnings from Campbell Soup (CPB), Brown-Forman (BFB), Ollie’s Bargain Outlet (OLLI) and Five Below (FIVE)

Thursday: European Central Bank meeting on interest rates; weekly jobless claims in the United States; revenue from Nio (NIO), Signet Jewelers (SIG), Vail Resorts (MTN), DocuSign (DOCU) and Stitch Fix (SFIX)

Friday: Bank of Russia meeting on interest rates; consumer price index in the United States; U.S. Consumer Sentiment from the University of Michigan

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