In more than two decades as an investor, I'd argue that no company action consistently generates more hoopla, while doing nothing from a fundamental perspective, than stock splits.
A stock split allows a company's board of directors to alter a company's share price by increasing or decreasing the number of shares outstanding. For instance, a forward 2-for-1 stock split of a company with a $100 share price and 50 million outstanding shares would yield a company with a $50 share price and 100 million outstanding shares. The market cap remains exactly the same, but the share price has been halved.
Even though stock splits have no impact on a company's valuation or underlying operating performance, they do bring a number of positive psychological factors to the table. For investors who aren't able to buy fractional shares of stock, a forward stock split lowers the cost to buy a single share. Perhaps most important, companies that engage in stock splits often have a nominally high share price -- and companies achieve a nominally high share price by executing and innovating on the operating front. In other words, companies splitting their stock are almost always performing above and beyond the expectations of Wall Street and investors.
Right now, there are five ultra-popular stocks with nominally high share prices that would benefit immensely if they were to enact a stock split.
E-commerce giant Amazon.com (AMZN 0.14%) has split its stock three times since becoming a publicly traded company. The problem is that it hasn't enacted a split since September 1999. If you have access to fractional-share investing this isn't a big deal. But if you don't, you'll need to save up almost $3,200 just to buy a single share. A significant forward stock split would open the door for more retail investors to lay their claim to this dominant online retailer.
How dominant, you ask? A report released in April by eMarketer pegged Amazon's U.S. online market share at 40.4% in 2021. This means $0.40 of every $1 purchased online in the U.S. is routing through Amazon's marketplace. This retail dominance has also helped the company sign up over 200 million people to a Prime membership worldwide.
Amazon is also a cloud infrastructure services kingpin. Amazon Web Services (AWS) had an annual run-rate of $54 billion in sales, as of the first quarter, and it's generating considerably higher margins than the company's retail operations. AWS should play a key role in expanding Amazon's cash flow, and a stock split would allow a larger number of retail investors to participate in its long-term climb.
Cloud-based e-commerce platform Shopify (SHOP -1.18%) would also be wise to consider a stock split. With its shares up nearly tenfold in less than three years, investors without fractional-share investing access would have to set aside about $1,206 to buy a single share, as of this past weekend.
Shopify found itself in the right place at the right time during the coronavirus pandemic. The consumer disruption caused by the coronavirus pandemic prompted businesses to create an online presence. In just the first quarter of 2021, gross merchandise value (GMV) on Shopify's network surged 114%. In the six years prior to the pandemic, GMV grew by an annualized average of 78%.
Although Shopify has had no trouble landing big-name accounts, such as Walmart and Pinterest, small merchants are the company's bread and butter. The company notes that 45,800 of its partners referred a merchant to the platform over the trailing 12 months, ended March 2021, which is up 73% from the previous year. Shopify has minimal e-commerce growth headwinds, and a stock split could allow smaller players to take part in its epic run higher.
Another FAANG stock that should strongly consider enacting a stock split is Alphabet (GOOGL 0.52%) (GOOG 0.45%), the parent of internet search engine Google and streaming platform YouTube. To buy a single share of Alphabet, depending on the class of share you purchase, will set you back between $2,394 and $2,452.
If you thought Amazon was the 800-pound gorilla in the room in e-commerce, take a closer look at how dominant Alphabet's Google is for internet search. According to GlobalStats, Google has controlled between 91% and 93% of all internet search over the past two years. It's no wonder why advertisers are champing at the bit and willing to pay a premium to get their message in front of consumers.
And it's not just Google that makes Alphabet special. YouTube has become one of the three most-visited social destinations in the world. Meanwhile, the company's cloud infrastructure segment (Google Cloud) has consistently been growing sales near a 50% pace on a year-over-year basis.
As my colleague Dan Caplinger pointed out last year, even splitting the shares of one of Alphabet's classes of common stock could prove beneficial.
Chipotle Mexican Grill
Few companies scream "millennial consumer" quite like Chipotle Mexican Grill (CMG 0.31%). The fast-casual restaurant chain has seen its stock rise tenfold since 2010, but the company hasn't enacted a stock split. For folks who can't buy fractional shares, it means setting aside approximately $1,326 to buy a single share.
The Chipotle success story is a function of the company's willingness to offer natural and organic food options, as well as to adjust its operating model to prevailing conditions. The millennial generation has placed a lot of emphasis on supporting sustainability and small businesses. Chipotle caters to millennials by first-and-foremost buying a lot of its produce from local farms. Although it can't supply its chains entirely from small farms, it hasn't lost touch with the message that made it a popular destination for millennials.
It's also been willing to shift its operating model to improve engagement and foot traffic. The pandemic saw Chipotle begin offering deliveries, as well as install Chipotlanes at some of its locations. Chipotlanes are next-generation drive-thru lanes for folks willing to place their orders via a mobile app.
Suffice it to say, getting with the times and splitting its stock could potentially boost millennial ownership in Chipotle's shares.
Finally, even though electric-vehicle (EV) manufacturer Tesla Motors (TSLA -0.37%) split its stock 5-for-1 less than a year ago, CEO Elon Musk should consider making the move again (perhaps 2-for-1 or 3-for-1) to make its share price as nominally affordable as possible for retail investors.
Despite the immense challenges of the pandemic, Tesla came within a whisker of hitting Musk's aggressive production target of 500,000 EVs in 2020. With two gigafactories operational and two additional production facilities in the works, Tesla could realistically grow its EV output by roughly 50% a year over the next couple of years.
This probably goes without saying, but the opportunity within the EV space is massive. An IHS Markit study from earlier this year suggested that 10% of all new cars sold in the U.S. by 2025 would be electric. Meanwhile, the Society of Automotive Engineers of China is projecting that half of all new vehicles sold by 2035 in China will run on alternative energy. These are two of the biggest auto markets in the world, and Tesla has the clear lead in battery power, capacity, and range at the moment.
Another stock split might allow Tesla's retail investors to stomp on the gas.