Stock of the week - Amazon (10.03.2022)

• Amazon announced 20-to-1 stock split

• Share price jumped 6% on the news in pre-market trading

• Chance for Dow Jones membership increases

• Buyback programme extended from $5 to $10 billion

• Double bottom near 50% retracement

Attention of investors is largely focused on war in Ukraine nowadays and it is easy to miss some interesting announcements from companies. One such announcement came from Amazon yesterday. The US e-commerce giant announced that its Board agreed on a 20-to-1 stock split as well as expansion of a buyback programme. Let's take a look at what it means for investors? 

Amazon announced 20-to-1 stock split

Amazon announced a 20-to-1 stock split on Wednesday, that is still subject to approval from the company's shareholders. Shareholders will receive 20 new shares of Amazon for each share they held previously with share price being adjusted by split factor. Trading at a post-split price will begin on June 6, 2022. This will be the first stock split the company has done in over 22 years. Investors reacted positively to this news with Amazon stock trading 5% higher in premarket today.

Impact of stock splits

What exactly is the impact of a stock split on investors' portfolio? In theory, none. Investors will receive 20 new shares with each having price 20 times lower than prior to the split. As a result, value of a stake will not change. However, stock split announcements and splits themselves often are followed by increase in company's share price. Splits make shares more accessible for retail investors. For instance, 1 share of Amazon cost over $2,900 in today's pre-market trading and unless investors have an access to fractional share trading, some may simply not be able to afford purchasing shares with such a high price tag. However, a 20 times lower share price - $145 - would not create such an issue.

Another important factor to consider in terms of Amazon and stock split is index membership. Amazon is a member of many capitalization-weighted indices, like Nasdaq or S&P 500. However, stock has not yet made its way into price-weighted Dow Jones. Lowering of share price through stock split will make it easier to include Amazon in the index without need for major rebalancing.

Buybacks

Stock split was not the only major announcement from Amazon. Company also announced that it has authorized a $10 billion extended buyback programme that will replace the previous $5 billion buyback programme. Previous buyback programme was authorized in 2016 and the company has bought $2.2 billion worth of shares to date. Just like other big tech companies, Amazon prefers to distribute profits to shareholders primarily through buybacks rather than dividends. This approach is often criticized as it exerts artificial upward pressure on share price because purchases are most often carried out on the open market. Nevertheless, it means that there will be another factor pushing prices higher in the coming months. Of course, tt does not necessarily mean that prices will rise as there are other factors needed to consider as well, like for example geopolitical developments.

A look at the chart

Amazon (AMZN.US) has been trading lower recently amid broad market sell-off that has hit tech companies especially hard. Stock dropped back to late-January 2022 low this week, marked with support zone ranging between 50% retracement of post-pandemic recovery move and $2,750 mark. Current pre-market quotes suggest that stock will launch today's trading with a big bullish price gap and start trading near the resistance zone marked with 38.2% retracement ($2,930-2,970). Should we see a break above this hurdle, the next target to watch will be a short-term downward trendline - currently in the $3,070-3,080 area. Key resistance to watch over medium-term in case recovery move lasts can be found near 23.6% retracement. This area hosts a neckline of a double bottom pattern. Textbook range of a breakout from this pattern points to a potential upward move towards $3,835.

Source: xStation5