To The Moon

$Amazon.com(AMZN)$Amazon announced a 20-for-1 stock split for the first time since 1999. It is a welcomed move as the share price jumped 6% after trading hours.

Stock splits do not change the value of the company and it is more of a cosmetic move, making it more ‘affordable’ for stock investors and option traders or even for employees to convert their options to shares.

Amazon’s share price will go from $2,785.58 to $139.28. So speculators are just jumping in to buy in the view that others would buy because of the split - it is exactly what Keynesian beauty contest describes.

Nonetheless, it is still a good sign because only good stocks which have performed well do stock splits. The market has recognised the results and have priced the stock much higher over the years.

A growth stock should see it split many times in its history. This is the fourth time Amazon did a stock split. Apple did 5 times already. Coca-Cola did 11 times.

A tangible benefit would be the inclusion of Amazon into the Dow Jones Index (DJI). DJI is a price-weighted index and Amazon was ‘overpriced’ to be added into it but it becomes possible after the split.

Addition into a major index is a boon because the ETF managers would have to buy the stock so as to mimic the index changes. That could drive up momentary demand for Amazon stock.

An accompanying announcement to the stock split was a $10 billion share buyback initiative. Unlike the stock split, buybacks have impact to the company’s fundamentals.

The last time Amazon announced a share buyback was back in 2016 and the amount was unused until the start of this year. It has since used up $2.12 billion on buybacks.

You can see that this is unusual given that Amazon doesn’t have the habit of doing share buybacks. It is largely because there is always something to invest in to enhance the Amazon flywheel. Bezos is an aggressive executive who would keep pushing the company forward - always Day 1 mentality.

Maybe the new CEO Andy Jassy has a different take. Announcing a share buyback is akin to resting on their laurels, signalling to others that there are no better uses of the money.

This share buyback is announced on the back of a negative free cash flow in FY2021 results. Yes, Amazon still has $36 billion in cash. But that is just 8.6% of its total assets, the lowest percentage in the past 5 years (13%-16%).

It makes sense that the cash buffer goes up as the scale of the company grows but Amazon is going the other way with this buyback.

I don’t get this share buyback. I don’t think it is the best capital allocation decision. But well, the board with Bezos on it has approve it.

It is possible that they are confident that the free cash flow would have plentiful surplus in 2022 and that the current stock price is attractive enough to do a buyback. Time will tell.