Stock splits don't change a corporation's prospects. But the move often generates renewed interest from investors and makes shares of companies appear cheaper, even though their underlying value remains the same. In other words, a recent stock split does not constitute a particularly good reason to invest in a business.
Still, there are excellent picks among the companies that recently announced stock splits. Let's look at two of them: Shopify (SHOP -2.37%) and Amazon (AMZN -1.64%). Here's why, stock split or not, both of these tech giants are worth holding for a very long time.
1. Shopify
Shopify announced a 10-for-1 stock split on April 11. The move still needs to be approved during a shareholder meeting on June 7. Shares of the company are currently changing hands for about $600 a piece. If the split went into effect today, shares would be worth roughly $60, although there would be 10 times as many.
But while the company's value won't change as a result of this move, there is plenty to like about Shopify. The company has helped hundreds of thousands of merchants open online storefronts. In today's environment, having an online store for a business is practically a necessity. However, many business owners don't have the knowledge or expertise to build one.
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Consider how valuable the company's offerings are. Merchants looking to open up shops online need a whole suite of services: A platform that makes it easy to build an online storefront, a way to handle payments, shipping, inventory, marketing tools, and more. Shopify offers all of these services into a single platform and therefore makes the lives of its merchants much easier. Business owners can then focus on what they do best: run their day-to-day operations.
The frantic pace at which Shopify's client base has grown is a testament to how essential its services are to online merchants. In the four years between the end of 2017 and 2021, the number of merchants on Shopify's platform grew from 609,000 to 2,063,000. That's an increase of 238.8% during that period. There remains plenty of room to grow in the e-commerce market. According to some estimates, the industry will record a compound annual growth rate (CAGR) of 18.7% through 2028.
In 2021, Shopify's revenue grew by 57% year over year to $4.6 billion. The company's adjusted EPS came in at $6.41, compared to the adjusted EPS of $3.98 reported in 2020. Analysts see Shopify's revenue growing by 37.8% per year for the next five years.
Although Shopify's stock recently dropped due to the fact that the company's pandemic tailwind seems to have come to an end, the tech giant's long-term prospects remain intact. That's why investors should purchase its shares, and not because of the upcoming stock split.
2. Amazon
Amazon's news of a stock split came in last month. The company's 20-for-1 split will take effect on June 6. With shares worth around $3,100 as of this writing, one could argue that it was time for the company to resort to this move. More importantly, though, Amazon's business looks as solid as ever. And even with a market cap of roughly $1.5 trillion, there is plenty of room for the company to grow.
One of Amazon's greatest strengths is that it is a leader in multiple industries. For instance, the company's Prime Video held a 19% share of the streaming market (in viewing time) in the U.S. in the fourth quarter of 2021, coming in second only behind Netflix. Meanwhile, Amazon holds the top spot in the e-commerce and cloud computing markets. It is also a major player in the music streaming industry.
On top of that, the company benefits from a solid competitive edge, including a strong brand name. Amazon came in at the fourth spot in Forbes' 2020 ranking of the world's most valuable brands. Some of the industries Amazon dominates still have long runways for growth. For instance, the cloud computing market will expand at a compound annual growth rate of 15.7% through 2030, according to some estimates.
Investors can expect Amazon to continue to invest heavily to remain at the top of this (and other) lucrative markets. What does that mean for the company's future? Even after soundly outperforming the market in the past 10 years, Amazon is still well-positioned to deliver more excellent returns, especially for those willing to be patient. That's why this tech stock remains a buy.
