The most important lesson Alphabet and Tesla investors can learn from Amazon's stock split

Could 2022 be remembered as the year of the stock split? Maybe yes. Several companies have already done splits this year, most notably Amazon (Amazon shares - ticker AMZN). More are on the way, and investors especially await the upcoming stock splits of Alphabet and Tesla.

No doubt you will find very different opinions on the merits of buying these titles before or after their respective splits. Often, however, looking at the past we can understand what the future holds. Here's the most important lesson Alphabet and Tesla investors can draw from Amazon's recent stock split.

It's complicated

The explanation for why companies choose to do stock splits is simple. When stock prices get too high, many small investors can't afford to buy the stock. Although the split does not change anything in a company's underlying asset, the move can attract other small investors who want to buy the stock.

While this explanation is really simple, the factors that influence the performance of a stock after a split can be complicated. And that's the most important thing that investors awaiting Alphabet and Tesla splits should learn from Amazon's example.

Prior to the 20-1 stock split in early June, Amazon's stock was quoted well over $ 2.000. After the split, the Internet giant's share price was just over $ 100. This is obviously a much more accessible price for retail investors. You might think this would have triggered a significant jump in Amazon's share price, but it didn't.

There are a number of reasons why Amazon shares have not soared. The most important is that every stock is affected to some extent by the broader market dynamics. Amazon made its stock split at a time when the overall stock market was collapsing. It is very difficult to swim against the tide during market declines.

Furthermore, stock splits do not cancel out the specific challenges that companies face. For example, Amazon disappointed investors with its first quarter results, announced in April. The company is experiencing cost pressures from inflation and its own excess capacity. The stock split did not help alleviate these problems.

Dynamics in evolution

Does this mean that Alphabet and Tesla stocks will not rise sharply when the companies do their stock splits? Not necessarily.

First, the dynamics of Alphabet and Tesla are different from those of Amazon. All three companies have very different business models. This is true even if Alphabet and Amazon compete with each other in some areas.

The general dynamics of the stock market may also change as Alphabet and Tesla perform the stock split. Of course, it's not long before Alphabet's 20-to-1 split, scheduled for mid-July. Tesla, on the other hand, has not yet set a date for its proposed 3-by-1 split. Either way, however, the overall stock market could be significantly better or worse than it was during Amazon's split.

It should also be noted that the dynamics of Alphabet and Tesla have changed since the previous stock splits of the two companies. For example, Alphabet did only one split in its entire history, in 2014. This was before TikTok emerged as a rival to YouTube.  

The buying dynamics of high-priced stocks have also changed over time. Many brokers now support fractional stock buying in companies like Alphabet and Tesla. This widespread availability makes stock splits less impactful than in the past.

What really matters

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

Perhaps 2022 will be remembered in the future as the year of stock splits. However, I think it is more likely that the stock splits that have been the center of attention will be largely forgotten. But investors likely won't forget how Amazon, Alphabet, and Tesla capitalized (or un-capitalized) their business opportunities.