Stock splits have occupied headlines in the financial world during 2022. Difficult conditions in the stock market have prompted companies to pull unconventional levers to keep their share prices buoyant, and this one is a fan favorite.
Take e-commerce giant Amazon (AMZN 1.21%), for example. It announced a 20-for-1 stock split that would reduce its price per share from the current $2,485 to $124. The conventional wisdom suggests this would make Amazon stock more accessible to smaller investors, therefore attracting more money and boosting the company's overall value. In reality, though, it's important to remember that splits are purely cosmetic.
Three Motley Fool contributors examined the recent first-quarter 2022 earnings reports for some of the hottest stock-split stocks. Alphabet (GOOG 0.69%) (GOOGL 0.77%) and Tesla (TSLA 3.11%) posted solid results, whereas Amazon faced some challenges. Here are the details.
Soaring through the cloud
Anthony Di Pizio (Alphabet): The parent company of Google and YouTube had a mixed start to the year, but there was definitely more strength than weakness. The company generated sales of $68 billion in the first quarter, representing growth of 23% year over year. While it was a solid result, it was a slowdown from the 34% growth rate in the prior-year period. That's the reality investors may need to come to terms with now -- the pandemic environment is fading, and leaders in the digital economy may not grow as quickly as they did in the last two years.
Still, there were some major bright spots in Alphabet's quarter. Revenue generated by the company's cloud business increased a whopping 43% compared to Q1 2021. Although Google Cloud makes up just 8.5% of Alphabet's total revenue, it consistently grows at above 40%, which indicates it will eventually be far more impactful on the company's results.
The cloud is an exciting opportunity that could be worth over $1.5 trillion annually by 2030. It offers companies a path to operating online, helping them connect their teams in other countries or states, and provides them with an ever-expanding suite of tools. They include data storage and analysis, virtual machines, and even a low-code artificial intelligence platform.
Still, Alphabet's flagship service is Google Search. It owns over 92% of the entire search market, and we're probably not going to stop using the internet anytime soon so any softness in financial results is unlikely to last forever. That's one reason investors should jump at the chance to buy Alphabet stock at its current 25% discount to its all-time high.
The stock trades at a price-to-earnings multiple of 20, based on its 2021 earnings result. That's a 33% discount to the Nasdaq 100 technology index, which trades at a multiple of 30, and while 2022 might be a year of consolidation for Alphabet, analysts expect a strong return to growth in 2023. Except if you wait until then to buy the stock, it might be too late to catch a bargain.
Tesla impresses with expanding margins
Trevor Jennewine (Tesla): Electric car pioneer Tesla delivered another impressive earnings report in Q1 2022. Despite supply chain trouble and rising costs, vehicle production rose 69% to 305,400 units, and deliveries rose 68% to 310,000 units. That translated into strong financial results.
Revenue climbed 81% to $18.8 billion, and Tesla continued to gain market share in the U.S., Europe, and China. Better yet, its industry-leading operating margin expanded to 19.2% as Tesla continued to reap the benefits of pricing power, highly automated factories, and a significant cost advantage in battery cell production. In turn, free cash flow skyrocketed 660% to $2.2 billion.
Looking ahead, despite a difficult macroeconomic environment, CEO Elon Musk expects deliveries to rise between 50% and 60% for the full year. And while margins will likely contract in the short term as production ramps up at the new Gigafactories in Berlin and Texas, the company should be more profitable than ever once those factories reach scale. The Gigafactory Berlin is especially important, as it will localize Tesla's European business, much the same way that Gigafactory Shanghai localized its China business. That means logistics costs will drop because Tesla won't have to ship as many vehicles into Europe.
Perhaps more exciting, Musk announced plans to build a dedicated robotaxi. The vehicle will be optimized for autonomy and low-cost transportation, and it's expected to reach volume production in 2024. That puts Tesla one step closer to its goal of running an autonomous ride-hailing service. While some investors are undoubtedly skeptical of Tesla's valuation -- the stock currently trades at 118 times earnings -- management says full self-driving (FSD) software will eventually be the most important source of profitability. In fact, Ark Invest thinks autonomous ride-hailing platforms will generate $2 trillion in annual profits by 2030. That enormous figure makes Tesla's price tag a little easier to stomach, and it should leave Tesla bulls with a feeling of excitement.
A tech giant that slumped
Jamie Louko (Amazon): While other big tech stocks reported strong growth, Amazon shares fell sharply. So what caused this stock drop? The biggest surprise was Amazon's profitability. It announced a Q1 net loss of $3.8 billion, which is much lower than the net income of $8.1 billion it had in the year-ago quarter. This was primarily because of the company's investment in Rivian (RIVN -0.69%), which lost $7.6 billion in the quarter.
This downturn dampened the company's financial picture: Its free cash flow burn accelerated from $7.8 billion in the year-ago period to nearly $17.8 billion in Q1 2022. To make things worse, Amazon also announced disappointing Q2 guidance. Amazon sees revenue growing only between 3% and 7% year over year, but Wall Street was expecting top-line growth of 9% for Q2.
Amazon's stake in Rivian will continue to skew its net income figures, both to the upside and the downside. Therefore, to get a more accurate picture of the profitability of Amazon's business operations, investors should look at operating income. This quarter, operating income was $3.7 billion, which was a decline from the year-ago period's results of $8.9 billion, but is much better than the dismal net income it reported.
Another silver lining is Amazon Web Services (AWS), which continued to execute. This segment grew 37% year over year in Q1 and attracted new customer commitments across a wide range of industries. AWS continued to prove its dominance in the cloud this quarter, which could push the company to success over the long term.
While the company's earnings report might not have been the brightest, it certainly isn't time to sell your shares. Like any company, Amazon had a bump in the road. However, this company is still a dominant player in multiple industries, and its brand name and size could help it to continue succeeding over the long term. While its investment in Rivian may have hurt this quarter, the business itself was not severely damaged. If you don't own shares of Amazon yet, you might consider picking up a share or two after this stock drop, because the business is still on track to dominate.