Sometimes when a company generates significant growth and attracts a lot of stock purchasing interest, its stock price soars to the point that it becomes too expensive for small investors to even consider trying to buy. Warren Buffett's holding company, Berkshire Hathaway (BRK.A -2.04%) (BRK.B -1.96%), is a great example. Its Class A stock now trades at around $477,000 for a single share. Berkshire management wanted to make the company more accessible to shareholders, so it began issuing Class B shares in 1996. That stock trades at a more reasonable $320 a share.
Some hypergrowth technology companies face a similar popularity problem, but rather than issue a new class of shares, they've instead opted to conduct a stock split. Google parent company Alphabet (GOOG -1.65%) (GOOGL -1.60%) Class A shares trade around $2,310 per share right now, but it recently announced a 20-for-1 split to occur in mid-July, which will increase the number of shares in circulation by 19 times, while shrinking its stock price down to about $115.50.
Image source: Getty Images.
It's important to note here that stock splits don't change the intrinsic value of the underlying business, but they sometimes result in more small investors buying into the company as it becomes more affordable to do so (Berkshire Class B shares went through a 50-for-1 stock split in 2010 to keep its price reasonable). Another way to make higher-priced stocks affordable is to purchase fractional shares. But this option isn't available to all investors and depends on the brokerage being used.
While it's best to focus on the core fundamentals of the particular business when considering a stock investment, it can be a consideration for some. If it's a factor you find important, here are two companies that have announced plans to split their stock this year. Just know that these particular stock-split stocks are worth buying just on the merits of their success.
1. Alphabet (Google)
Alphabet's operational diversity is one of its greatest strengths. In the difficult economic conditions that have sent the tech-centric Nasdaq-100 index plunging into a bear market, having multiple revenue streams can help insulate a company against severe external shocks.
Alphabet's Google is the dominant search engine globally with over 92% market share, and while it's the source of the brand's household notoriety, Alphabet's other business segments shouldn't be overlooked.
Google Cloud is an up-and-coming cloud services platform that offers everything from collaborative digital documents to low-code artificial intelligence and machine learning tools for developers. Google Cloud revenue grew 43% year over year in the recent first quarter of 2022, outpacing Alphabet's overall revenue, which grew at 23%. The cloud industry is set to top $1.55 trillion in annual value by 2030 (at a 15.7% compound annual growth rate), so it's promising to see this business unit can gather steam for Alphabet because it could drive significant growth.
The company also owns the world's most-popular video platform, YouTube, which has generated $29.7 billion in advertising revenue over the last 12 months. Together, Alphabet's segments are contributing to a highly profitable broader company that generated $112.20 in earnings per share (EPS) during 2021, which places its stock at a price-to-earnings ratio of just 20, a discount to the Nasdaq-100, which trades at a ratio of 25.
Analysts expect Alphabet's earnings will be flat in 2022, which is part of the reason for the current stock price discount. But the metric is expected to return to growth in a big way in 2023 with over $132 in EPS anticipated. That's an opportunity for investors to pick up the stock right now while it trades down 25% from its all-time high, especially with a looming stock split that could generate renewed investor interest.
Image source: Getty Images.
2. Tesla
Electric vehicles (EVs) promise to be one of the most transformative technologies in a generation. Management at semiconductor powerhouse Micron Technology, which specializes in memory and storage chips, describes these new cars as data centers on wheels. The EVs require the processing power of advanced computers, and in the case of Tesla's (TSLA -3.54%) fleet, they feature a range of digital innovations including the ability to browse the internet and play games on the in-car infotainment system, in addition to rapidly improving self-driving capabilities.
Tesla is currently the global leader in the EV industry, and not just by the numbers. The CEO of one of its key competitors, Volkswagen Group, has praised Tesla for its innovation not only inside its cars, but also in its production processes, which have unlocked new levels of efficiency.
As Tesla has ramped up vehicle deliveries (to 310,048 in the first quarter of 2022), its automotive gross profit margin has climbed to a new high of 32.9%. That high margin demonstrates the benefit of scale: As the company builds more cars, its fixed costs continue to shrink as a percentage of revenue, which paves the way for more profits. And in the recent quarter, the effects flowed to the bottom line, with adjusted EPS rocketing 633% year over year to $2.86.
But the company promises to be more than just a carmaker; it's also making strides in green energy generation and storage. Tesla's residential solar roof holds promising potential, and its residential battery storage deployments nearly doubled in the first quarter with production struggling to keep pace with demand. Tesla has even dedicated a new factory to building more batteries.
Tesla management has announced its intention to split its stock -- which currently trades at $755 a share -- sometime this year, but it hasn't yet specified the details. Tesla conducted a 5-for-1 split back in 2020, which was closely followed by surging gains in its stock price. To be fair, the price gain coincided with solid operational progress, which was likely the real source of the price growth then.
The upcoming split might also be followed by more stock price growth for investors. But again, that probably will be more attributable to Tesla's growing vehicle deliveries and soaring profits.
