Written by: Susannah Streeter | Hargreaves Lansdown
- Amazon shareholders have voted for the company’s 20:1 stock split, effective on 3 June.
- There are a number of other high-profile potential stock splits expected to take place over the summer, including Alphabet, Gamestop and Tesla.
- Stock splits intend to reduce the share price to a level that makes it more accessible to retail investors, without changing the value of the company.
- The stock split shouldn’t make a difference to the overall value of an investor’s holding – the new shares should be approximately one-twentieth of the price of the original shares, to reflect the 20:1 split.
- We share the answers to our clients’ commonly asked questions on stock splits.
Amazon shareholders have voted in favour of the 20-for-1 share split at the company’s AGM – a move which is designed to make owning individual shares in the company more affordable and potentially attract new investors. It's Amazon’s first split since the heady days of the dotcom bubble back in 1999 but comes at a time when a wave of volatility has hit the stock. Amazon’s share price has fallen by 37% year to date, as worries wash over the financial markets about the era of ultra-cheap money coming to an end. It’s been caught up in a tumble of tech stocks, a fall which accelerated this week as Snap’s downbeat outlook cast fresh clouds of doubt over the US economy. It’s now facing the double whammy of worries about a downturn in consumer confidence hitting its retail arm, and concerns about escalating costs at the company.
Amazon ramped up its labour force to match a surge in pandemic demand, but it’s now facing a dilemma – it needs to reduce its army of workers to be more in tune with slowing sales growth but needs to avoid kicking off fresh labour disputes over working conditions.
Fifteen of the other shareholder resolutions which Amazon investors voted on were around worker rights and other "social" issues and environmental issues, such as calls for the company to report on worker health and safety or the treatment of its warehouse workers. The majority of shareholders rejected the resolutions but a number of large institutional investors
, had said they were going to back some of them. So it’s clear that this thorny issue over labour shows little sign of going away any time soon.
Amazon has plenty of strengths up its sleeve, not least that it can still lay claim to the title of the King of E-Commerce, despite slower sales headwinds. But the real jewel in the crown is its highly profitable and fast-growing AWS cloud computing arm. Demand for Amazon Web Services products shows little sign of slowing and, despite competitors snapping at its heels, it still dominates the market.
As retail faces more of a struggle, Amazon is shape-shifting and pouring more cash into new investment opportunities with an increased focus on services. Total services, which includes Prime as well as AWS, accounted for around half of revenues last year. Growing this area of the business is behind the acquisition of MGM studios, which comes with an impressive content backlog, including the likes of James Bond. Progress in this strategy may be key to whether the company will emerge from this current bout of volatility a bit shaken, but not stirred too far away from its longer-term growth trajectory.’’
Commonly asked questions
With over 1.7m clients, we know what investors ask when it comes to stock splits.
What is a stock split?
It does exactly what it says on the tin – a stock split is when a company chooses to split existing high value shares into a larger number of lower value new ones. It’s important to remember that the overall value of the company remains the same, as does each investor’s share of the company – it’s just divided into more units.
Who decides on whether a stock should be split?
Whether or not to split shares is up to the company, and they can choose to do it as many times as they want. For example, Apple’s split its stock five times since it listed, with the last one in August 2020.
Why do companies do it?
It’s a common misconception that they’re done to raise money, whereas they’re actually done to try and lower the price of shares.
How do they work?
XYZ plc, which has a market capitalisation – or total company value – of £200,000 representing 200,000 shares of £1 each, announces a two-for-one stock split. Following the split, there would be 400,000 shares worth 50p each. The market capitalisation is still £200,000, but the price of each individual share has halved, making them more accessible.
How do they affect existing investors?
The overall value of investors’ shareholdings won’t change – the only discernible difference will be that the number of shares they own will go up. It’s as if you had a £20 note which someone took off you and gave you back four £5 notes – it’s the same amount of money, but just broken down into smaller values.
When will the stock start trading at the new price?
The split will take effect on June 3, and the stock will start trading at the new adjusted split price on June 6.