What Is A Stock Split & Expectations For Amazon ($AMZN) Q1 2021 Earnings

Okay, it is Thursday, 29th of April. I'm joined by our Head of Trading, Piers Curran, and we're going to have a quick chat about Amazon. Their earnings, of course, coming out after market today specifically, but I want to cover kind of two things: a quick overview of what to expect from the earnings report, but more importantly, and what has been helping their share price appreciate throughout the week, has been speculation over a potential stock split, which they've not done in a very long time. And rather than just kind of say those words, I wanted to use this as a bit of an educational piece to really understand what is a stock split, how does it work, how do typically share prices react? And I know Piers is the perfect person to answer that question. So, um, no pressure, Piers. To set the scene first, let's just talk about the earnings. And I think with any earnings report, it's good to look at a few specific areas other than the top-level kind of numbers. But those numbers— expecting another strong quarter, revenues anticipated to be above $100 billion. You heard me right, $100 billion. And profits between $3 to $6 billion. Overall, obviously a big pandemic winner with the whole lockdowns that are being witnessed globally. Some analysts I've been reading on the street have been talking about this idea for prime customers that it could be very difficult, in fact, to actually break these pandemic habits. And I definitely believe not just from a consumer level, but even a corporate level, I wonder if the pandemic was far shorter whether or not we truly would see a change in work practices and hybrid working. But because it's been quite a long period of time now, it's almost like it's normal. Any take on that about those behavioural patterns, do you think?

Yeah, I mean, I think that obviously they have been a huge beneficiary of COVID and the uncertainty is how sustainable is that. And I think inevitably, you know, you're going to see a tapering off of that COVID spike, but it won't taper back to pre-COVID levels. As you say, habits are, you know, are formed now, and we're going to change the way we operate in a lot of aspects of our lives, and certainly the way we work. And so I think, you know, Apple— sorry, Apple— Amazon will continue to be a beneficiary of COVID long after COVID's gone away.

And there's a couple of other areas to look at here. I'll get on to AWS. Jassy at the moment. But before that, this week we've had— last night, Apple, we've had Facebook, but particularly Alphabet, Facebook, they've had particularly strong advertising revenues on the back of the kind of reopening that's underway now. Twitter, who also reports after market tonight, is up about 4% in pre-market, kind of a sympathy play that they're expected to get a boost on that as well. For Amazon, in terms of their financial metrics, this falls under the category of other at the moment. But do you see any developments around the ad business of Amazon?

Yeah, for sure. And it's something that's— yeah, as you mentioned and suggest, it's kind of untapped. Well, it's a revenue stream we don't hear much about because they kind of tuck it under that bracket of other, and we don't get any detail around it. So it's hard to know. How big it is, and more importantly, it's hard to know how quickly that revenue stream is growing for Amazon. But like, you go onto the Amazon website, and it's a bit of a funny one because initially you think, well, hang on, there aren't any ads. But then, of course, it's all ads, because what you do on that site, you buy products, you buy other people's products. And so I guess it's having, you know, it's building out that kind of advertising infrastructure where products can be placed at the top of product searches. And yeah, there's definitely huge growth there for Amazon to build and expand that out. But I think probably for me, it's interesting, you know, one of the big risks for Amazon is that Bezos is stepping away from that day-to-day CEO role. He's stepping away in Q3 of 2021, or at least that's the plan. He announced this in February of this year. We don't know the specific date when in Q3, but Yeah, that's the big uncertainty for the future of Amazon, certainly in the near term, right? And I'm interested to see the guy taking over, who's the guy who heads up their AWS, their Amazon Workspace side.

Yeah, and if I remember rightly, he's been there since the late '90s. I mean, he's not a newbie, new to the rodeo here.

Yeah, absolutely. He's, you know, cut him in half and he's Amazon right the way through. And he's been there from the start. And I think that, Is it, you know, choosing him to take over the reins, is that a nod towards the kind of direction of the business strategy, let's say, over the next decade? And is it kind of going to be that AWS side of things that becomes an ever bigger juggernaut? And that's had huge growth on the AWS side anyway. It's been a hugely successful part of the business, but it'll be interesting, inevitably him coming in may well just steer the focus and the focal point of their growth strategy towards the AWS side, whereas I think Bezos, clearly, it's on that retail side that he's been building that empire.

So on that CEO transition, I think that's a good time then to also discuss about the potentiality of a stock split. Because as you say, it's kind of a meaningful marker, this move from Bezos to Jassy. So first off, before we talk about Amazon. I know you've got some comparisons with Apple and other companies, but what is a stock split?

Yeah, so it's— the first important thing to understand is it doesn't change it in terms of the business and its value. The change is nothing in terms of the business strategy, in terms of what the business does, in terms of the total value of this business. It changes absolutely nothing. It's all— it's just a technical change in terms of the shares that are issued and available to buy and trade in that company, right? So a share split is just taking the total number of shares that are available now and issuing new shares. So often you'll have— you'll hear about a 2-to-1 stock split. Let's start there because it's the easiest from the maths point of view. If you've got 10 million shares in issuance now, you issue another 10 million, okay? And everyone who every single person who holds one share then gets another one. Okay, so instead of having one, you've now got two. All right, but the share price changes and it drops. You divide the old share price by the multiple, so in this case two, so the share price halves. So you— the value of your ownership doesn't change, like in that instant, you just— let's say the share price is $10 and you've got one of them. Okay, you hold one share and it's worth $10. You then have a 2-for-1 stock split. What happens is you just hold two shares, each are worth $5. So you still own $10 worth, but you just got two shares now. So this is a stock split. Okay, um, now why, why bother? You know, that's really the, the, the important question here. And what's quite notable about Amazon is they have not had a stock split since 1999. And that's unusual when you look at their big rivals, and Apple being a really good example. You know, Apple have had 5 stock splits since the year 2000. So they're unusual, Amazon, in not having a stock split. The reason and the evidence for that is the value of their shares. So their share price is knocking around $3,450 per share. Now think about it from an investor's point of view, a small investor, like an individual person. Well, to own Amazon shares, that's quite a hard hurdle— sorry, high hurdle, right? If you want to buy some Amazon shares, it's $3,450 per share. When you go and look at Apple, well, you know, you can buy Apple shares— well, if you enter the market today, you're looking at about $133.

And with, I guess, the concentration of the new demographic who are trading, a lot of younger people, I'd say the concentration is on names they're familiar with. They're definitely familiar with Amazon. I don't think many could drop $3,500 at the drop of a hat.

Right, exactly. So really, it brings— like Apple's Tim Cook, because they split their stock again last year. And he was asked, well, why are you doing it again? And he said, look, I just want more people owning the stock. He said, I want a larger, more diverse community having access to own our company. And yeah, that's quite an interesting story. I mean, it drives up— in theory, it increases demand at the very bottom level. And that's the individual, really tiny, small investor. It doesn't really change much for institutional investment, of course, because then they're throwing around billions of dollars worth of this stock, right? So it doesn't really matter for them. This is about the lowest tier, and it's about building up the bottom of the pyramid, if you like. And so one aspect of that is that, you know, it brings in more people who can buy it, but then also it improves liquidity is another kind of reason why you might want to go ahead with a stock split. So it just means that it probably increases the volume of trading. It increases the number of people, if you like. Let's just say, you know, there's more buyers and sellers for 10 shares at $10 per share than there are for 1 share at $100 per share, right? So there's more liquidity. This makes the functioning of that market more efficient. But I say that, but really for Amazon, Amazon stock is super liquid anyway, even though its share price is really high. So it's not a particularly valid reason when you're talking about Amazon, I would say. Another good reason for a stock split, it's good PR.

Everyone's thinking exactly that when you were talking about Apple. And we all know Apple is the king of PR when it comes to that kind of branding, the Apple religion product kind of proposition.

It's good PR, right? But again, is that valid? I mean, Amazon— I mean, does it need PR? I mean, we talk about Amazon all day long anyway, so it's very different.

I always find it's very different. I mean, with that, with Apple products, you need to buy into that brand, that premium, the quality. Yeah, I mean, Amazon is much more transactional almost at this point, at least. I know they're looking to diversify. One of the things we're looking out for an update in the earnings is Amazon Pharmacy and these other things, and that will continue, I'm sure. But I mean, even the look and feel of the website kind of relays that transactional feel.

It's interesting you say that. Now that you say that, it's like Apple, right? They're selling high-cost, premium, super slick hardware, OK? And yet they've got a really low share price, or a relatively low share price, I should say. Whereas Amazon, exact opposite. They're selling really low-priced items to the retailer, and yet they've got a really high share price. I wonder whether subconsciously, you know, on the board level, Amazon are like, because we're down in the gutter selling cheap stuff, maybe having a high share price kind of gives us that impression of high quality and high value. Whereas Apple is almost like they don't need to do that. They don't need a high share price because the quality, the tangible quality of their product is so high quality and high value. I wonder whether there's something in it there. But I mean, it's interesting that they're doing this now. Well, hang on, let me rewind. They might not do this now. Let's just be clear, they haven't announced this. This is rumor, and we may well find out tonight when they release their Q1 earnings. And this is what people are looking out for, and one of the reasons why the stock has been up this week running into these earnings is not only because we're expecting amazing figures again, But it's actually also because of this stock split potential. But it'll be interesting. Look, their shares, they're actually the third highest. They have the third highest share price in America in terms of listed shares. You know who the numbers 1 and 2 are? No.

Well, hit me.

Well, number 1 is like out there in a league of its own. Berkshire Hathaway, Buffett's company, if you want to buy one Class A share, that'll cost you $410,000 per share. Now that's a barrier to entry right there. Now Buffett has— this is his intentional strategy because he says, I want like-minded investors to be owning my stock. I want investors that are only interested in long-term value propositions, long-term profits, okay, which is obviously his, you know, his ethos. So he doesn't want the— he doesn't want the, the new kind of millennial kind of, you know, buy a penny stock and dump, pump and dump, right? Um, the number 2 company you'll have never heard of— well, maybe you have, I don't know— but they're called NVR Inc., which is a home builder, a mortgage company. Their share prices clock in at $5,000. But then it's Amazon, right? So their share price is very, very high. And I personally, I think they're long overdue a stock split. Now the question is, what will the ratio be? Some of Apple's stock splits in the past— I said they've done 5 over the last 20 years— but in 2000, in the year 2000, they did 2 for 1. 2005 again was 2 for 1. And historically, 2 for 1 or 3 for 1 are the kind of norms. But then in 2014, Apple did a 7 -for-1 stock split, and then again last year, 4-for-1. Now, I personally think because Apple haven't done it for 20-odd years and their share price is so high— Amazon. Amazon, sorry.

Yeah, Apple obsessed, Piers.

Because Amazon haven't done it and their share price is so high, I would expect them to go big. Like, rather than having to do a stock split every couple of years, I'd expect maybe even a 10-for-1.

Yeah, I think rumors were 5 to 1 that were going around a few days ago.

It might be— yeah, I'd be interested to see if it was 10 for 1, which is almost be unprecedented, and certainly amongst big companies, then that would take their share price from $3,450 obviously down to $345. So we'll see. There's another interesting, maybe final angle for you. Dow Jones Index. Now, this is like— that's the first ever stock index. It's traditionally the kind of marquee flagship US index. It's the Dow Jones 30, right? But the thing about this index and the way it's priced, it's a price-weighted index, okay, which basically means the value of the index— basically, you take all 30 companies, you just add up their share prices, And then you— there's a multiplier. So basically, at the moment, by how much does the Dow Jones Index move? How many points does it move? Well, it moves like for every $1 share movement in any of the underlying 30 stocks. If one stock moves $1, then that, that has a 6.8-point movement in the index. All right, because it's price-weighted like that, which is unusual, Amazon have got a real problem. They'll never be in the Dow Jones Index because their share price is too high. If you add up all Dow Jones stocks' share prices now, it's about $5,000, give or take, right? But Amazon's share price is $3,500. So if Amazon were to go into the Dow, they would make up 40% of the index, which is why it'll never happen. So I wonder whether Bezos to kind of round off his legacy, I wonder whether this is a play for him to say, right, I'm stepping back. I want my stock into the Dow Index just because perhaps that's something he's always aspired to, and maybe that will be his sign-off, perhaps. So there's that Dow Jones Index angle in there, and I wonder whether that's got anything to do with it.

Okay, I'll ask Jeff when I see him next, and we'll see what happens tonight. So don't forget as well, we'll have the usual Amplify Live Market Watch podcast go out— Spotify, Apple, all the other platforms— on Friday. And what we'll do is we'll have a catch-up, Piers and I, and we'll go through, have they done this? If so, how has the market reacted? We'll go into more detail. So thanks very much, Piers.

Cheers, Anthony.

See you later.