The past few weeks have brought major news when it comes to stock splits. Some of the biggest and most talked-about companies have announced them. Why are stock splits so exciting? Because they bring down the price of stocks that have soared sky high. This opens the door to a broader range of investors. And a stock split offers current investors more flexibility when it comes to increasing their holdings of the company.
Right now, I own shares of two companies that announced stock splits in recent weeks: Amazon (AMZN -1.64%) and Tesla (TSLA 12.06%). I haven't yet decided whether I'll buy more shares before or after the split. But one thing is for sure: I will increase my position in these two dynamic companies. And here's the No. 1 reason why.
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Profit or revenue growth
The reason actually is pretty simple. A stock split usually indicates a company is doing well. If a stock has climbed over a long period of time, it's often because the company has posted solid profit and/or revenue growth.
We can see that in the case of Amazon.
And we also can see that in the case of Tesla.
So why do I think Amazon and Tesla will continue to flourish? Let's start with Amazon.
Amazon generates revenue in two growing markets: e-commerce and cloud computing. The U.S. e-commerce market alone should reach $1 trillion this year, according to an Insider Intelligence report. And Amazon holds about 40% of that market, the data show.
Amazon is a powerhouse here thanks to the strength of its Prime subscription service. Prime boasted more than 200 million members globally as of 2020. And Amazon said it's added "millions" of new members worldwide during the most recent quarter. Prime offers various free same-day and one-day delivery options to members. That's a big incentive to keep buying on Amazon.
Of course, when most people think of Amazon, they think of the e-commerce business. But the business that actually drives profit is the company's market-leading cloud computing business -- Amazon Web Services (AWS). AWS represents 74% of Amazon's total operating income. Of course, there are rivals out there. But AWS has remained leader with a 32% to 33% market share over the past few years, according to Synergy Research Group. And AWS continues to attract new business and expand its operations.
About 70% of the U.S. market
Now let's talk Tesla. The electric vehicle maker holds almost 70% of the U.S. market. This is based on registration data from Experian. Rivals may take some share in the coming years. But Tesla's brand strength and growth make me optimistic this leader can stay ahead.
Last year was a big one for Tesla. The company increased deliveries by 87% to 936,222 vehicles. Tesla reported $5.5 billion of GAAP net income and $5 billion of free cash flow. It's important to note that Tesla was able to produce such results even after spending $6.5 billion to expand its production capabilities.
Tesla recently reported a 68% increase in first-quarter vehicle deliveries to more than 310,000. The company managed to make this enormous gain even as it's faced chip shortages and factory shutdowns. These are temporary situations. So they won't hold Tesla back forever. Two other factors that will boost deliveries are new factories in Berlin, Germany and in Austin, Texas in the U.S. The company's next goal is to ramp up production in those locations.
So, all of these elements are signs that more revenue lies ahead for Amazon and Tesla. And that means the shares -- at a lower price level -- clearly could make their way higher once again.
This doesn't mean I would go out and buy every company that does a stock split. In some cases, the solid performance of the past years won't repeat itself. But this sort of operation is a signal to at least give a company a close look.
