Shares of Alphabet (GOOG 0.21%) (GOOGL 0.41%) are soaring early on Wednesday, and understandably so. Google's parent company delivered a blowout quarter after Tuesday's market close. However, if there's a little more oomph to the price action it's likely Alphabet's decision to declare a 20-for-1 stock split.
We all know that splits are zero-sum games. If you own 100 shares of Google at $3,000 today you'll own 2,000 shares of Google at $150 when the split is executed. It's the same amount of money. In this golden age of many brokers allowing folks to buy fractional shares it's not as if a high price is a barrier to entry for even retail investors who are just starting out with limited means.
However, investors still see splits as a show of confidence. A company feels that it can declare a split because it believes the stock will keep moving higher from the adjusted starting line. You don't see too many high-flying businesses announcing a split following a bad quarter with a bleak near-term outlook.
Who will be the next big stock to go this route? I see Chipotle Mexican Grill (CMG 0.44%), Amazon (AMZN +2.02%), and MercadoLibre (MELI 1.07%) as some of the big-priced names that are just asking to make like a banana and split.
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Splitting headache
This won't be the first time Alphabet splits its stock. It did this back in 2014 when -- as Google -- it issued a new class of non-voting stock to protect its insider stock's class with superior voting rights. It was a basic 2-for-1 process to hand off the new class of stock, but a split nonetheless. A single traditional stock split through nearly 18 years of public trading is a pretty big deal, but that's how Alphabet found its way into trading in quadruple digits.
Why will Chipotle, Amazon, and MercadoLibre be the next likely stocks to split? There are other companies with larger market caps than those three, but I don't think Warren Buffett is going to play the split game with his original class of shares. Then we have ocean transport and a homebuilder that I don't think really care about appealing to retail investors. Chipotle, Amazon, and MercadoLibre are consumer-facing names. All three are also posting strong growth, with strong catalysts to keep the good times rolling.
Chipotle has had its share of setbacks. The burrito roller suffered through a few outbreaks of food-borne illness roughly a half-dozen years ago. It recovered. Chipotle also was hit like most chains with the COVID-19 crisis in 2020, and it bounced back even harder. Chipotle was already making inroads with digital orders, drive-thru lanes, and playing nice with third-party delivery services before the pandemic, so it was positioned perfectly for when eateries had to close down their indoor dining rooms. It was generating positive comps several quarters before most quick-service chains did.
Amazon and MercadoLibre naturally didn't skip a beat during the pandemic. E-commerce got a boost when in-store shopping either wasn't available or was considered unsafe. Amazon globally and MercadoLibre in its Latin American stronghold were able to expand their reach through the crisis, and they've been rewarded with strong growth and quadruple-digit price tags.
Despite the recent market correction that has been particularly hard on MercadoLibre -- with the shares trading for a little more than half of last year's high -- a stock split is certainly a real possibly in the near term. The playbook is pretty clear, and the clock is ticking.
