The new year hasn’t been kind to the financial markets, but one bright spot appeared on Wednesday when Amazon (AMZN) announced a 20-for-1 stock split.
Trading in the thousands of dollars per share, Amazon stock has long been viewed as inaccessible to the average investor—a situation that appears to have been remedied in the wake of the announcement.
Amazon has split its shares three times previously: once in 1998 and twice in 1999. Amazon shares are up over 4,000% since the last split in September 1999.
Stock splits occur when companies break up existing shares to create a higher number of lower-value shares. The intent of a split is usually to make shares more affordable to a wider pool of market participants, which in turn improves the liquidity of the shares in the marketplace.
Reports suggest the split may open a path for Amazon to join the Dow Jones Industrial Average.
Founded roughly 137 years ago, the Dow is one of the market’s oldest equity indexes, consisting of 30 prominent U.S. companies. The last two companies to gain inclusion in the index were Salesforce (CRM) and Honeywell (HON) during the 2020 trading year.
Positive momentum stemming from the upcoming stock split and potential inclusion in the Dow could help Amazon shares rebound from recent underperformance. Prior to the split announcement, Amazon shares were down nearly 20% year to date.
The stock has rebounded since the announcement and is now trading north of $2,900 per share. If the split were to occur today, that would mean that the new Amazon shares would trade for roughly $145 per share.
However, the split isn’t scheduled until early summer, with new stock distributions expected to occur after the close on June 3. That means the split-adjusted shares will start trading on June 6.
The big question, of course, is how Amazon shares will fare leading up to the split—and after.
Most market participants will recall that Apple (AAPL), Nvidia (NVDA) and Tesla (TSLA) all rallied in the wake of past split announcements. Nvidia announced a 4-for-1 split on May 21 last year, and shares in the chipmaker rallied roughly 35% in the lead-up to the official split date of July 20, 2021.
Shares in Tesla rose 81% in the three weeks between the announcement of its stock split on Aug. 11, 2020 and the official split date on Aug. 31, 2020.
But the risk dynamic on Wall Street then was vastly different compared with today.
Similar to mergers and acquisitions, stock splits are a form of “corporate action.”
Corporate actions generally constitute any activity that causes a material change in an organization. In that regard, corporate actions are defined as changes that impact stakeholders in material fashion—whether they be shareholders or bondholders.
And just like there’s no guarantee that a stock will outperform after a merger, there’s certainly no guarantee that a stock will outperform after a stock split.
In fact, according to tastytrade research, the average stock tends to underperform the S&P 500 in the wake of a split, as illustrated below.
Of course, one must keep in mind that stocks like Apple, Amazon, Nvidia, and Tesla are far from average.
What’s interesting about Amazon’s situation in 2022 is that it’s eerily similar to Tesla in 2020. That’s because Tesla not only split its stock in 2020, but it was also ultimately added to the S&P 500 later in the year.
In 2022, Amazon appears poised to one-up that achievement via its potential inclusion in the Dow.
Readers can learn more about stock splitting by tuning into a recent episode of Options Jive on the tastytrade financial network. A previous installment of Market Measures focusing on the historical performance of Apple shares after previous splits is also recommended.
To track everything moving the markets on a daily basis, readers can also tune into TASTYTRADE LIVE weekdays from 7 a.m. to 4 p.m. Central Time at their convenience.
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Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to email@example.com.