The Most Important Lesson Alphabet and Tesla Investors Can Learn From Amazon's Stock Split

How will Alphabet and Tesla perform after their stock splits? There's a key lesson to be learned from Amazon.

Could 2022 go down in the books as the year of the stock split? Maybe so. Several companies have already conducted splits this year, notably Amazon (AMZN -0.68%). Others are on the way, with investors especially anticipating upcoming stock splits for Alphabet (GOOG 0.72%) (GOOGL 0.48%) and Tesla (TSLA 2.54%).

You'll no doubt be able to find very different opinions about the merits of buying these stocks before or after their respective splits. But you can often gain insight into what the future might hold by looking at the past. Here's the most important lesson Alphabet and Tesla investors can learn from Amazon's recent stock split.

It's complicated

There's a simple explanation for why companies choose to conduct stock splits. When share prices get too high, many small investors can't afford to buy the stocks. Although splitting doesn't change anything about a company's underlying business, the move can attract more small investors who want to buy the stock.

While this explanation is indeed simple, the factors impacting how a stock performs after a split can be complicated. And that's the most important thing investors looking forward to Alphabet's and Tesla's stock splits should learn from Amazon's example.

Before its 20-for-1 stock split in early June, Amazon's shares traded at well over $2,000. After the stock split, the internet giant's share price was only a little over $100. That's obviously much more affordable for retail investors. You might think this would have sparked a significant jump in Amazon's share price, but it didn't.

There are multiple reasons why Amazon's shares didn't soar. Most importantly, every stock is affected to some extent by broader market dynamics. Amazon conducted its stock split at a time when the overall stock market was tanking. It's very difficult to swim against the tide in market sell-offs.

Also, stock splits don't override specific challenges that companies face. For example, Amazon disappointed investors with its first-quarter results, announced in April. The company is experiencing cost pressures due to inflation as well as its own excess capacity. The stock split did nothing to alleviate these issues.

Changing dynamics

Does this mean that Alphabet and Tesla stocks won't enjoy solid bumps when the companies conduct their stock splits? Not necessarily.

For one thing, the dynamics for Alphabet and Tesla are different than those for Amazon. All three companies have very different business models. That's true even though Alphabet and Amazon do compete against each other in some areas.

The overall stock market dynamics could also change by the time Alphabet and Tesla conduct their stock splits. Granted, there's not much time remaining before Alphabet's 20-for-1 split in mid-July. However, Tesla hasn't even set a date yet for its proposed 3-for-1 split. In either case, though, the overall stock market could be significantly better or worse than it was during Amazon's stock split.

Keep in mind, too, that the dynamics for Alphabet and Tesla have changed since the companies' previous respective stock splits. For example, Alphabet has conducted only one split in its entire history, back in 2014. That was before TikTok emerged as a rival to YouTube.

Even the dynamics for buying high-priced stocks have changed over time. Many brokerages now support buying fractional shares of companies such as Alphabet and Tesla. This widespread availability makes stock splits less impactful than they've been in the past.

What really matters

Ultimately, what really matters for Amazon, Alphabet, and Tesla is how much their respective businesses can grow over the long run. All three companies have certainly demonstrated their ability to deliver strong growth in the past. Each of them also should have solid prospects.

Maybe 2022 will be remembered in the future as the year of stock splits. However, I think it's more likely that the stock splits that have been the focus of so much attention will be largely forgotten. But investors probably won't forget how Amazon, Alphabet, and Tesla capitalized (or didn't capitalize) on their business opportunities.

Source : https://www.fool.com/investing/2022/06/30/alphabet-tesla-investors-learn-amazon-stock-split/