The stock market is having a rocky 2022 so far, with the benchmark S&P 500 index falling 7.8% year to date. The tech-centric Nasdaq 100 is faring even worse, losing about 15%. Companies are turning to unconventional methods to buoy their share prices, and initiating a stock split seems to be the go-to move for some of them.
Amazon (AMZN -1.64%), Tesla (TSLA 12.06%), Shopify (SHOP -2.37%), and Google parent company Alphabet (GOOG 0.74%) (GOOGL 0.55%) have all announced plans to split their stocks this year. The goal is to make their respective shares more affordable for retail investors, who typically have a smaller amount of money to deploy into the market.
But if I had to buy one company splitting their stock in 2022, there's a clear no-brainer.
Image source: Getty Images.
Stock splits don't add any real value
Stock splits are purely aesthetic and don't change the underlying fundamentals of any company. They don't make a business any more valuable, but there is an assumption among investors that splits can result in more money flowing into the given stock. And there is some evidence supporting this.
Alphabet trades at a stock price of $2,534. Amazon trades at $3,043. Conventional wisdom suggests that smaller investors shy away from owning these companies because, in some cases, they can't afford to own a full share without it occupying a dominant portion of their portfolio.
Hence, Amazon's 20-for-1 stock split, for example, would reduce its stock price to $152 per share, making it easier for retail investors to own. The perception is that more money would then flow into Amazon stock, boosting its overall value. That perception resulted in Shopify, Amazon, Alphabet, and Tesla all experiencing a stock price rise the day they announced their respective plans to split.
| Company | Stock Price Gain on Day of Split Announcement |
|---|---|
| Shopify | 2.3% |
| Amazon | 5.4% |
| Alphabet | 7.4% |
| Tesla | 8.1% |
Chart by author.
With that said, a stock split alone isn't a worthy reason to buy, and it's still crucial for investors to focus on the merits of each of these companies. For me, one of these businesses stands far above the rest.
The stock-split stock I'd buy
Amazon is the largest e-commerce company in the world, towering over companies like Shopify, but its relentless focus on innovation means it has also become one of the most diverse. Beyond retail, it owns an industry-leading cloud computing platform in Amazon Web Services (AWS), a top streaming service in Amazon Prime, a presence in the electric vehicle (EV) industry through its stake in Rivian Automotive (RIVN -2.21%), and finally, a booming advertising business that is crushing its competition.
AWS is arguably one of the best reasons to own Amazon stock. Despite accounting for just 13% of the company's $469 billion in revenue during 2021, it was responsible for 74% of its overall operating income. While the e-commerce business cements Amazon's global presence, AWS underpins the financials and, therefore, supports investments into new areas. Not to mention, it's the No. 1 cloud platform globally -- and that industry could be worth over $1.5 trillion annually by 2030.
One of Amazon's newer segments is advertising, where the company revealed it generated $31 billion in revenue in 2021. It's, therefore, 14 times larger than the advertising business of its key competitor Walmart, and it even stands above the $28 billion generated in 2021 by popular Alphabet-owned video platform YouTube, which has over 1.7 billion monthly users.
With Amazon owning other platforms like Amazon Music and high-value content like the rights to the NFL's Thursday Night Football, the company is constantly expanding its digital advertising presence into other forms of media. It's an advantage that competing e-commerce players like Walmart simply can't match.
Beyond the stock split, Amazon is a great investment
Amazon generated $64.81 in earnings per share in 2021, which places its stock at a price to earnings multiple of 46. That's a premium to the Nasdaq 100 index, which trades at a multiple of 31, but there are plenty of reasons investors value Amazon above the broader market.
Over the last five years, the company has grown its revenue at a compound annual rate of 21%. But it has increased its earnings per share by a whopping 58% annually over the same period, with the highly profitable Amazon Web Services segment growing to represent a larger share of the overall business.
As Amazon's advertising business continues to flourish, it could be yet another high-profit-margin addition to the company's bottom line. And its investment in the electric vehicle (EV) space through Rivian could yield significant capital returns over the long term, especially as EVs become the dominant share of car sales in the next few decades.
It's hard to beat Amazon for its growth, diversity, and future potential. That's why I'd own it over any of the other stock-split stocks right now.
