Stock splits are all the rage lately, and it's not hard to see why.
Sometimes, the shares of strong companies rise until they're trading at inconveniently high-dollar amounts for retail investors. Slicing those equities into smaller, cheaper pieces that are more attractive to individual investors continues to prove a winning strategy. Numerous companies that have carried out splits have enjoyed notable gains.
Consider that Tesla's share price jumped by 80% during the three-week period between when it announced its last stock split and when it carried it out in August 2020. The electric vehicle leader's shares took a significant jump recently following news that it's planning another split.
While stock splits don't actually do anything to enhance a business's intrinsic value -- and shouldn't be the core reason for making an investment -- some industry-leading companies that are planning them will likely deliver stellar long-term performances. With that idea in mind, we asked a panel of Motley Fool contributors for their top stock-split stocks to buy this April. Their picks: Amazon (AMZN 1.49%), RH (RH 1.99%), and Alphabet (GOOG 1.43%) (GOOGL 1.42%).
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This tech leader will keep dominating
Keith Noonan (Amazon): Amazon is on schedule to carry out a 20-for-1 stock split in June -- the e-commerce and cloud-computing giant's first split since 1999. With Amazon currently trading at roughly $3,089, this move will make its shares more attractive and accessible for retail investors, and could help power short-term gains. However, I think the tech giant's long-term growth potential is even more appealing.
Amazon Web Services (AWS) leads the cloud infrastructure market, and it's primed for impressive growth as more businesses carry out digital transformation initiatives and communication services increasingly rely on digital channels. Revenue from AWS soared 37% in 2021 to $62.2 billion, and the segment's operating income climbed 37% to $18.5 billion. The unit's strong earnings are giving Amazon more financial flexibility to make big investments in growing the entire business.
Amazon is making massive property and equipment purchases in order to strengthen its position in e-commerce. Outside of Alibaba in China, no player in the space even comes close to rivaling the scale and infrastructure advantages that Amazon has in the category. Its incredible reach and pricing power will continue to make it very difficult for rivals to challenge its position in the space.
What's more, the company's leading position in e-commerce has created growth opportunities in other categories with much higher margins. Because its marketplace is the go-to destination for online shopping, Amazon's platform is an incredibly valuable digital-advertising and data destination. The tech leader's core businesses are incredibly strong on their own, but they also act synergistically to strengthen other units, positioning Amazon fantastically to deliver long-term wins.
Discounted price for this luxury brand
Jason Hall (RH): RH is one of the most interesting companies I follow. It's a wonderful retailer that focuses on well-off shoppers looking for high-quality furniture. And that business has been good. Over the past decade, RH's revenues have grown by 292%. And an increasing percentage of those sales are dropping down to the bottom line. Over the same period, RH has steadily improved both its gross margin and operating margin, with the latter coming in at a juicy 25% in 2021. Even more impressive, the company's cash margin came in at 14.9% last year.
RH Operating Margin (TTM) data by YCharts
Investors today can pick up shares of this luxury furniture retailer at a bargain-bin valuation. It's trading at just 14 times forward earnings, and at a price-to-earnings-growth (PEG) ratio below 1.
Why is RH stock so cheap now? In part, its share price reflects the market's worries that high inflation and slowing growth will take a bite out of its profits. In addition, though, it may be because CEO Gary Friedman isn't content to rest on his laurels. He has some very big plans for the company, both with an international expansion and a move into new categories, among them, operating luxury hotels and chartering private jets and yachts.
There's definitely risk with RH. These initiatives won't come cheap, and if they don't pan out, the company's impressive returns on capital will take a huge hit, as could the RH brand. But I think a lot of that risk is already priced into the stock, and in Friedman, RH has a proven, dedicated leader. And that would be the case with or without a stock split.
Alphabet has a competitive moat and is selling at a bargain price
Parkev Tatevosian (Alphabet): Alphabet has announced that it will undertake a 20-for-1 stock split on July 15. Investors looking for a monster stock that will be splitting can undoubtedly do worse than Alphabet. The company's Google search engine is arguably the most dominant service in existence, with a global market share of 85.5%.
The search engine is the core of a business that has grown its annual revenues from $46 billion in 2012 to $258 billion in 2021. Alphabet generates most of its revenue from advertisers looking to get the attention of browsers searching the internet, folks watching YouTube videos, and people using Gmail. And even though it has achieved a massive scale, it still has room to expand.
Globally, advertisers spent $763 billion in 2021 (not counting U.S. political ads), up by 22.5% from the year before. What's more, Alphabet is benefiting as a more significant share of that ad spending moves to digital channels. Marketers are showing a preference for digital advertising, primarily because of the measurement benefits. Trying to determine how many sales were driven by a billboard ad is significantly more challenging than tracking the results of ad spending on Google or YouTube. The trend is unlikely to reverse and could drive sales for Alphabet for many years.
Investors can buy shares of this fantastic business at a bargain valuation, too. Alphabet is trading at a price-to-earnings ratio of 24.4 and a price-to-free-cash-flow ratio of 27.7. Both are near the lower end of the average ranges it has sold for in the last decade. Alphabet is a monster stock-split stock investors can buy now for those reasons.
