How Will Amazon Price React to The Split?

What will happen?

Amazon announced the company is going to make a 1 – 20 stock split on June 3 after the trading session close (23:30 GMT+3). Investors will receive 20 shares for each share they currently own.

The company also said the board authorized it to buy back up to $10 billion worth of shares.

How do splits affect the price?

Stock splits are cosmetic and don’t fundamentally change anything about the company. However, historically over 70% of companies demonstrate growth after this procedure.

There are two reasons why stocks outperform after splits:

1. Investors view stock splits as a sign of confidence by management.
2. Splits increase liquidity by making shares more accessible to retail investors. As for Amazon, many investors wish to have this stock in their portfolios, but they can’t afford it for over $3 000. However, they might create a significant demand after the split and boost the price. 

How might it affect Amazon’s stock price?

Amazon stock is currently trading at a historically low valuation on capitalization-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) and price-to-sales metrics.

Another indication that the company may be undervalued is that management is repurchasing stock, which the company rarely does. The last time it happened was in 2011, during another swoon in the stock price.

Stock splits usually lead to increased interest from retail investors, but this happens during regular periods on the stock market. Currently, the US economy might be diving into a deep recession, and it's possible Amazon shares could go lower.

However, barring that extreme scenario, a lot of bad news is priced in today.

Technical analysis

Amazon, monthly chart

The stock lost more than 43% of its all-time high value. The price reached the historical support level of $2030. If it breaks through this level, it might plunge to $1720. However, we doubt that.

In our opinion, retail investors would love to purchase a part of such a giant company only for about $100, instead of $3000 a couple of months earlier. We believe the price will reverse at $2030 and fly towards the 50-month moving average at $2430, which is about 20% profit.

Conclusion

FBS analysts team believes Amazon stock is worth looking at ahead of the upcoming split due to several reasons:

• The company is oversold according to the fundamental indicators.
• The stock reached the global support area.
• The board is going to spend $10 billion on buyback.
• 1 – 20 split will decrease the stock price from $2000 to $100, providing a great opportunity for retail investors to become a part of this giant company.

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Author: FBS Analyst Team

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