Investors could experience delayed gratification with the stock splits of these tech giants.
Don’t buy when the price is too high. Buy when the price is lower. That’s what many buyers do. It’s why retailers frequently run special sales. And it’s also why publicly traded companies sometimes choose to split their stocks.
The idea behind stock splits is that smaller investors can’t afford to buy a stock when the share price is too high. But by chopping a single share into multiple shares, a company can make its share price much more affordable for those investors.
Two of the biggest technology companies on the planet decided to conduct 20-for-1 stock splits this year for this very reason. Amazon.com (AMZN -0.68%) completed its stock split in June, while Alphabet(GOOG 0.72%) (GOOGL 0.48%) will split its stock on July 15. Here’s why the Amazon and Alphabet stock splits could pay off big — in 2023.
Stock-split letdowns
Earlier this year, Amazon’s share price was well above $2,000. Many retail investors couldn’t afford to even buy one share at that nosebleed level. You might think that the company’s stock split, which brought its share price down to a little over $100, would have spurred a massive buying spree that sent the stock soaring. But it didn’t.
The reality is that Amazon stock actually fell after the stock split last month. Shares of the e-commerce and cloud leader remain lower than they were before the split.
Does that mean Alphabet will experience a similar stock-split letdown? Not necessarily. The dynamics in play when Alphabet conducts its stock split later this week aren’t exactly the same as those in effect when Amazon split its stock.
However, Alphabet’s limited stock-split history shows that investors shouldn’t count on a huge gain after its upcoming stock split. The last time the company conducted a stock split (in March 2014), its share price didn’t move very much.
A delayed effect?
I think there’s one primary reason why Amazon’s stock split wasn’t a rousing success and why Alphabet’s probably won’t be either. Blame it on the timing. Retail investors simply aren’t likely to rush into any stock when the overall stock market is down in the dumps. Amazon and Alphabet stocks have been hit even harder than the broader market.
However, that doesn’t mean that Amazon’s and Alphabet’s stock splits don’t matter at all. My hunch is that they will — but with a delayed effect.
Many economists believe the U.S. economy will enter a recession in 2023 if not sooner. A recent analysis by Federal Reserve economist Michael Kiley indicates more than a 50% chance of recession by the middle of next year based on a macroeconomic indicators model.
Stocks typically sink during the initial part of a recession. However, they often begin to rebound well before the recession ends. The average length of a recession since World War II is around 11 months. If the U.S. economy enters a recession before mid-2023, it’s quite possible that Amazon and Alphabet stocks could start a major comeback by late next year.
When retail investors return to buying stocks en masse, they’ll be much more likely to buy Amazon and Alphabet at share prices below $200 than they would with prices above $2,000. The stock splits of this year just might pay off big, but later than many investors might expect.
What will matter more
It’s important to understand, though, that Amazon’s and Alphabet’s stock splits won’t be the major factor in any future resurgence. Investors wouldn’t buy the stocks at any price if they didn’t believe in the companies’ long-term prospects.
That’s why Amazon’s and Alphabet’s business fundamentals matter more than their stock splits do. The good news is that both businesses remain strong.
Amazon has plenty of room for growth in its e-commerce and cloud hosting markets. The company continues to expand into new areas as well, including helping brick-and-mortar retailers with its “Just Walk Out” no-checkout technology and building a telehealth service.
Likewise, Alphabet’s Google services still dominate online advertising. Its Google Cloud unit is picking up momentum. The company’s initiatives in self-driving car technology and artificial intelligence could be huge winners in the coming years.
Both Amazon and Alphabet have formidable moats and optionality for future growth. My prediction is that these two stocks will deliver market-beating returns over the long term.
