In the midst of earnings season, perhaps the biggest jaw-dropping news event of all was the announcement from Alphabet (GOOG -1.96%) (GOOGL -1.97%), the parent company of internet search engine Google and popular streaming platform YouTube, that it would be enacting a 20-for-1 stock split.
Assuming shareholders vote in favor of the split (and there's no reason to suggest they won't), each share of Alphabet's stock would be valued around $143, post-split, by mid-July. That's down from a close this past weekend of almost $2,866 a share (for the Class A shares, GOOGL).
Image source: Getty Images.
The skinny on stock splits
A stock split is a way for a publicly traded company to alter its share price and outstanding share count without affecting its market value. For example, if a company's shares were trading at $400, and said company enacted a 4-for-1 stock split, shareholders would receive three additional shares for each share they already owned. Thus, if you had 10 shares at $400, you'd own 40 shares at $100 after the 4-for-1 split. The market value of the investment hasn't changed (both are still $400 total investments), but share price and shares outstanding have been adjusted.
This common type of stock split, known as a forward split, tends to get investors excited for two reasons. First, forward stock splits make shares more nominally affordable for retail investors. Even though some brokerages allow users to buy fractional shares, this isn't the case with every online brokerage. It's a lot more palatable for investors to purchase a single share of Alphabet around $143 than it is to save up almost $2,900 to buy a single share now.
Secondly, forward stock splits are almost always a sign of a successful business. A publicly traded company's share price wouldn't be high in the first place if it weren't executing well and innovating.
Having watched numerous big-name companies receive a boost after announcing a stock split, the following three high-flying stocks may be next to follow in Alphabet's footsteps.
Image source: Amazon.
Amazon
Believe it or not, e-commerce giant Amazon (AMZN -1.65%) has actually split its stock three times since its initial public offering. However, all three of those splits occurred in a 15-month stretch between June 1998 and September 1999. With no split activity for more than 22 years, the kingpin of online retail now has a share price of $3,152. That's a prohibitively high cost for one share.
The reason Amazon may jump at the opportunity to split its stock is simple: There's been a changing of the guard. As long as Jeff Bezos was CEO, it seemed unlikely that a stock split would be a consideration. But with Andy Jassy officially taking over the reins on July 5 of last year, the prospect of a split should be put back on the table. Jassy founded and led Amazon Web Services, the high-margin cloud infrastructure service segment that's No. 1 globally in cloud spending.
Furthermore, a stock split may light a fire under Amazon's shares after a mixed fourth-quarter report. Even though shares responded very well to the company's fourth-quarter earnings release, the bulk of Amazon's profit during the quarter was due to its stake in electric-vehicle manufacturer Rivian. Meanwhile, sales guidance for the first quarter came in about $2 billion below Wall Street's forecast at the midpoint. A stock split announcement could help reassure Amazon shareholders that the company's long-term vision is still well intact.
Image source: Getty Images.
AutoZone
Another high-flying stock that may be ripe for a stock split is automotive replacement parts chain AutoZone (AZO -1.45%). The company has split its stock twice since becoming a public company, but those splits occurred all the way back in January 1992 and April 1994. In the nearly 28 years since its last split, AutoZone's shares have crested above $2,000.
If you're wondering why AutoZone hasn't split its shares in nearly 28 years, look no further than the company's shareholder return program. Although it doesn't pay a dividend, AutoZone's board has been aggressively repurchasing shares of its common stock for more than two decades.
At the beginning of 1999, there were 150 million shares outstanding. But as of this year, AutoZone had just 20.6 million outstanding shares. Since commencing its share buyback program in 1998, the company repurchased more than 86% of its shares, with a cost of $29.2 billion. From a purely superficial standpoint, a forward stock split would seemingly erase the hard work management has put in to reduce the outstanding share count and make each remaining AutoZone share that much more valuable.
But now could be the perfect time for the company's board to split its stock. With only 20.6 million shares left outstanding, AutoZone's buyback opportunities are narrowing. What's more, the company's lofty share price has significantly reduced its average daily trading volume over the past two decades. to stay on Wall Street's and retail investors' radars, a split could be a genius move that causes investors to stomp on the accelerator.
A Tesla Model S charging. Image source: Tesla Motors.
Tesla Motors
A third fast-paced stock that would be wise to follow in Alphabet's footsteps and enact a stock split is electric vehicle manufacturer Tesla Motors (TSLA 4.96%). Tesla has split its shares once (August 2020) since becoming a publicly traded company in 2010.
There are three reasons a split would make sense for Tesla right now. To begin with, the previous stock split Tesla announced (5-for-1) came with its shares trading at $1,374. While they're a little bit below that figure at the moment (shares closed at $923 this past weekend), they did top $1,200 just five weeks earlier. Historic precedence would suggest a growing possibility of a split at these levels.
Second, CEO Elon Musk is well aware that retail investors strongly believe in his innovation and the future of Tesla. It's in the best interest of Musk to ensure that retail investors have easy access to purchasing Tesla's stock. That means lowering the share price so a broader gamut of investors can put their money to work.
Third, Wall Street remembers what happened the last time Tesla announced a stock split. The company's 5-for-1 split announcement on Aug. 11, 2020, led to a greater than 60% rally in shares in the 20 days leading up to the split. It's possible another strong rally could occur if the company were to split its stock again.
