Doing the Splits

Amazon shareholders might have gotten a minor heart attack when they looked at their portfolio this morning. The e-commerce company's stock, which was trading above $3,400 a share at the start of this year, opened today at about $125.

But Amazon shares aren't down 95% in six months. Instead, the company just completed a 20-for-1 stock split, and investors' number of shares multiplied by a proportionate amount—the total value of their position was unchanged. 

Rather than one share valued at Friday's closing price of $2,447, shareholders now have 20 shares each worth 1/20th of that amount.  Amazon’s total share count just jumped from 509 million to 10.2 billion. It's like getting 20 $1 bills in exchange for a $20 bill. Or cutting a pizza into more and more slices. The size of the pie hasn't grown or shrunk.

Not everyone's brokerage account seemed to immediately reflect that fact, however, judging by some panicky tweets this morning.

Amazon is only one of many major companies to split its stock lately:  Apple, Nvidia, and Tesla have all done so in the past few years. So have less notable firms including Sherwin-Williams, Amphenol, and McCormick. There have been about 20 splits a year by U.S. issuers over the past decade, says Dow Jones Market Data.

Google parent Alphabet, Shopify, GameStop, and Tesla (again) are among the other companies seeking to split their stocks in the coming months.

Announcements of upcoming stock splits and their subsequent implementation have often been followed by rallies—puzzling for those who believe in a rational market, given that there's no fundamental impact from a split beyond an increased share count.

It's a topic I wrote about in Barron's earlier this year. Here's what could be behind the counterintuitive trend:

Ultimately, the love from the market is more a symptom of stocks’ success than a result of their split plans. Companies that do splits tend to do so because their stocks have already risen a lot lately. And stocks with positive momentum are wont to continue rising.

“By itself, a stock split should neither create nor destroy any value,” says Christopher Harvey, Wells Fargo’s head of equity strategy. “The stocks that split typically have positive price momentum, generally good things are happening at the company, and fundamentals are improving. That’s what the market is focused on, and a stock split is just something you do when that’s happening.”

In other words, it’s more correlation than causation. But the numbers speak for themselves: Since 1980, S&P 500 stocks that have announced splits have beaten the index by 16 percentage points, on average, over the following 12 months, according to BofA Securities researchers.

Amazon stock enjoyed a healthy bump today and leading into the split: Shares closed up 2%, at $124.79 each, and have now gained almost 20% since late May. Adjusted for the split, they're still down about 27% this year, however.

Read more about the stock-split trend here, and about Amazon's split specifically here.