In a stock split, a company provides an increase in the number of shares to shareholders, correlating with a lowered price, keeping the total value of the shares the same. Early investors in Amazon (AMZN 1.80%) are very familiar with what a stock split can do for a company's stock price, the number of shares, and their total value when a split takes place. And an investor's choice on whether to stay long term in the stock could have been a multimillion-dollar decision.
Historical splits help spark share price growth
Since 1998, Amazon has had four stock splits, with three of those within about a 17-month stretch, from its first announcement in April 1998, to the delivery of shares for its third split, in September 1999. Let's look at three charts that show the share-price action before and after splits, the hypothetical value of an investment, and what the most recent split action looks like.
The first chart displays a time range from six months before the first split announcement through three months following the third split, so that you can see how the stock looked before and after each split.
As you can see, leading up to the first split, Amazon's stock was flat since its initial public offering (IPO) in May of 1997. Once the announcement of its 2-for-1 split took place the following April, the share price soared for a gain of 132% within three months.
By the time the second split, a 3-for-1, was announced in November of that same year, the share price had grown to $1.60, and from there it continued to climb an additional 56% to above $2.50 per share before the company announced a third split in a span of just 15 months.
The third split, another 2-for-1 deal, was announced in July of 1999, and was delivered to investors on Sept. 1 of that same year. By December, the share price had climbed even further, to $4.32, resulting in total share price growth of over 1,000% over a 20-month period.
A $10,000 investment multiplied quickly
As the chart below shows, a $10,000 investment in Amazon that began on the day of the first split announcement would have been worth over $120,000 at the end of that time. Meanwhile, that same $10,000 investment made in the S&P 500 over the same time would have been worth only a little over a 10th of that amount.
AMZN total return level. Data by YCharts.
How does the 2022 stock split compare?
Amazon's most recent split was announced on March 9 of this year, giving investors 20 shares for every share owned before the split. From the chart below, you can see that the stock was already facing downward pressure amid a broader market decline. But the announcement of a split helped to quickly make up for those losses, sending shares upward from $139, to $169 by the end of the month, for a three-week turnaround of 22%.
One of the reasons for a spike in share price when a split is announced is the realization that the stock will be more affordable to retail investors. Those who couldn't afford the $2,000-plus price will have an opportunity to get shares at a lower cost: just above $100 this time around.
Investors who can afford the higher price often buy shares leading up to the split with the idea that after the split, the new investors will continue to push the stock upward.
But as was the case with the three previous splits, when the hype settled down, so did the stock price -- temporarily. It also didn't help that Amazon released an earnings report that coincided with the split announcement showing that revenue grew for the first quarter, but by the slowest year-over-year rate in two decades, which also led to an earnings shortfall compared to consensus estimates.
The broader market decline is making it more difficult for the share price to bounce back following the split. But investors should keep in mind that the split just took place on June 7. After a 37% decline since the high of $169 following the split announcement, shares now sit at $106. According to analysts' average price target, the stock is valued at $178, a potential 68% gain above the current price.
And if history is any indication, that rebound could come quickly. The previous three splits all resulted in gains within three months of the split action date. The company also should have second-quarter earnings ready for release by Aug. 4, which could help propel a boost if investors like what they hear.
