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Why Amazon (AMZN) Stock Should Split Again

John Divine

At its peak in late July 2017, one share of Amazon (Nasdaq: AMZN) stock would set you back $1,083.31.

It's a bit lower today, but at more than $900 per share, there's no denying that most retail investors look at that price and say, "That seems expensive."

And when the median price of a blue-chip stock in the Dow Jones industrial average -- even after the Dow's 18 percent rally over the past year -- sits at just $97.03, it's understandable why Amazon's stock price seems almost prohibitive.

Thankfully, CEO Jeff Bezos doesn't have to intentionally run the company into the ground for investors to see Amazon stock trading below $100 a share again. All he has to do is split the stock.

[Read: FANG Stocks: Which One Is Leading in AI?]

There are two main reasons for stock splits. First, undergoing a stock split can gin up demand by appealing to both Wall Street psychology and individual investor psychology; both pros and Joes see splits as bullish signs, but for different reasons. Second, stock splits increase liquidity. An Amazon stock split makes a lot of sense for those reasons as well as several more.

Psychologically appealing. The job of any public company CEO is to maximize shareholder value. Amazon's Jeff Bezos has done this masterfully for 20 years now. AMZN stock debuted on the Nasdaq on May 15, 1997, at a split-adjusted price of $1.50 per share. Two decades later it was worth $957.97, or more than 638 times its original price.

That's pretty good.

While Bezos's visionary business decisions, disciplined risk-taking and demand for innovation are primarily what guided shares to their current lofty value, he also used stock splits along the way to help maximize shareholder value.

"Stock split announcements have typically been greeted by investors as bullish signs," says Barry Randall, technology portfolio manager for Interactive Brokers Asset Management. "The inference is that a company wouldn't dare split the stock and optically lower the share price unless it expected the price to rise in the short term. The inferred cause of the price rise might be something the company is on the verge of announcing, like a big contract or an accretive acquisition."

While Randall believes increased regulations have made such blatant signaling less common, stock splits still play to that aspect of Wall Street's psychology.

An AMZN stock split would appeal to many individual investors for an entirely different reason: Somehow Amazon stock doesn't seem so pricey! It certainly lowers the buy-in, as shares literally get cheaper.

The perception that AMZN stock would be a "better deal" for investors if it did a 50-for-1 split, bringing share prices down from $950 to $19, is fallacious. Pre-split shareholders simply own 50 times more shares, which are each worth one-50th what they were before. The pie doesn't get bigger when you cut it up into 50 slices.

Still, this fallacy often tempts retail investors. For better or worse, it would create more demand for AMZN stock.

There's also the more legitimate case that investors without a lot of capital might not have been able to afford one share of the e-tailer at $950. A stock split makes AMZN more affordable to more people, which would have a positive (but marginal) effect on demand.

[Read: The Best Ways to Value a Stock.]

Liquidity. "The best reason to split a stock is if it's illiquid," says Len Rosenthal, professor of finance at Bentley University.

If a stock "trades infrequently, has a low free float and a large percentage difference between the bid price and ask price," then it's illiquid, Rosenthal says.

To be clear, Amazon doesn't have any problems with illiquidity these days. An average of 3.9 million shares change hands daily, 397 million shares are available for public trading, and the bid-ask spread is comparable to Bank of America ( BAC), which costs less than $25 per share.

So while illiquidity is less relevant today than the psychological appeal, one reason an Amazon stock split makes sense is it proactively prevents illiquidity from developing in the long-run.

Subtler factors. Berkshire Hathaway ( BRK.A), the holding company run by Warren Buffett, is an extreme example of what happens when a successful company doesn't split its stock. One Class A share goes for about $270,000.

As a result, very few shares of Berkshire are traded on any given day. The average volume is 332, compared to Amazon's 3.9 million.

Liquidity concerns aside, extremely low volume would also be likely to create another problem that Amazon has never faced before: dwindling press coverage.

Amazon and Berkshire Hathaway have roughly similar market capitalizations, around $450 billion apiece, but Berkshire doesn't get half the attention from the press that Amazon does. And why should it? With 332 shares trading each day, the audience that cares about what Class A Berkshire shares are doing is effectively nil.

Press and public interest are worth something, especially to a company like Amazon, which caters to the masses and is constantly trying to drum up buzz.

Make AMZN cheap again. Amazon has split its stock before. Three times, actually -- in 2-for-1, 3-for-1 and 2-for-1 splits. One share of Amazon in 1997 is now 12 shares of Amazon, meaning its natural price would be 12 times higher if it were never touched.

Would investors have as avid an interest in AMZN if it were $11,000 or $12,000 a share? Probably not. And neither would the press, and that would hurt business.

The reminder to mom-and-pop investors that AMZN stock won't actually be a better deal if it splits and its share price becomes more affordable -- the pie is still the same size -- can't be said enough.

It seems an ideal time for Bezos to bite the bullet and split the stock once more, perhaps dramatically (10-for-1, anyone?). If left unchecked, a meteoric stock price looks cool, but it has its disadvantages. And the potential benefits to splitting are real.

While some agree that going down this path could boost shares, they don't view now as the right time to split.

"A stock split may make more sense at some point in the future when the stock is less of a consensus long than it is right now. There is no need to add fuel to the fire at this point with the stock up about 80 percent over the past two years," says A.B. Mendez, an analyst at Frost Investment Advisors who specializes in tech and consumer discretionary.

So sure, splitting Amazon's stock could be seen as begging for a price bubble. But there are two things to remember with that:

Bezos's mandate is to maximize shareholder value.

[Read: Why Amazon, Whole Foods Is a Natural Marriage.]

Overpriced stocks can be used advantageously as financing tools, to opportunistically swoop in and acquire other companies. Looks like Kroger ( KR) is still on the market.



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