A new mania has taken over Wall Street, and it has nothing to do with meme stocks, inflation, or coronavirus stocks. Since February, all eyes have been on stock-split stocks.
A stock split is a way for publicly traded companies to alter their share prices and outstanding share counts without having any impact on their market caps or operating performances. Stock splits tend to be viewed as bullish events by the investing community, with the understanding that companies enacting splits are often outperforming and out-innovating their competition.
Image source: Getty Images.
Over the past four months, Alphabet (GOOGL -2.00%) (GOOG -2.02%), the parent of Google and YouTube, Amazon (AMZN -1.64%), and Tesla (TSLA 4.78%), have all announced their intentions to split. Amazon's 20-for-1 split occurred earlier this week, while Alphabet's 20-for-1 split is set to take effect on July 15. Tesla's as-of-now unknown split details are expected to be voted on at the company's annual shareholder meeting.
The $64,000 question is: Which of these top-performing stock-split stocks makes for the better buy right now? Let's take a closer look.
Does Alphabet deserve an A+ or F from investors?
If there's a clear-cut reason for investors to love Alphabet stock, it's the company's absolute dominance of the internet search space. According to data from GlobalStats, Google has accounted for between 91% and 93% of worldwide internet search share over the past two years.
Having a virtual monopoly on search allows Alphabet to command exceptional ad-pricing power, as well as take advantage of long-winded periods of economic expansion. With the exception of a very short period during the height of the pandemic lockdowns, revenue tied to Google has consistently grown by a double-digit percentage.
But there's more to like about Alphabet than just its foundational operating segment. Streaming-platform YouTube is the second-most-visited social site on the planet, with 2.2 billion monthly active users. These eyeballs are helping to boost YouTube's ad and subscription revenue.
There's also Google Cloud, which is the world's No. 3 cloud infrastructure service provider. Google Cloud has been growing by 40% to 50% annually, and by mid-decade, it could be the driving force behind Alphabet's operating cash flow expansion.
On the other side of the coin, Alphabet is a highly cyclical business that will take it on the chin during recessions. Ad spending is typically the first thing to decline when an economic contraction arises. Since the vast majority of Alphabet's sales are dependent on ads, and investors are so accustomed to double-digit growth from the company, a moderate recession caused by historically high inflation and Federal Reserve monetary tightening could lead to sizable downside in Alphabet's shares.
Image source: Amazon.
Should you add Amazon to your shopping cart?
Most folks are probably familiar with Amazon because of its incredibly dominant online marketplace. According to a March report from eMarketer, Amazon is estimated to bring in 39.5% of all U.S. online sales in 2022. That's more than No. 2 through No. 15 in market share on a combined basis.
More importantly, the company's online success has translated into 200 million people worldwide signing up for a Prime membership. The annual fees tied to Prime help Amazon undercut its competition on price, as well as provide it with capital to invest in its leading logistics network.
If you need another reason to be excited about Amazon, look no further than its cloud infrastructure service segment, Amazon Web Services (AWS). Whereas Google Cloud is the global No. 3 in cloud service spending, AWS is the clear No. 1, with about a third of the world's market share.
Even with U.S. first-quarter gross domestic product shrinking 1.4%, AWS delivered sales growth of 37%. Because cloud operating margins run absolute circles around online retail operating margins, AWS is Amazon's golden ticket to long-term operating cash flow growth.
The downside to Amazon is that it's not a cheap company in a true fundamental sense. I doubt a forecast price-to-earnings ratio north of 140 in 2022 sounds appealing with the Nasdaq Composite in a bear market.
Additionally, Amazon's enormous investments in its retail operations and logistics are, for the moment, losing money. That's a substantial portion of the company's business that's obscuring the faster-growing, higher-margin aspects, such as AWS, advertising, and subscription services.
A charging Tesla Model S. Image source: Tesla.
Stomp the accelerator or hit the brakes on Tesla?
There's also electric-vehicle (EV) manufacturer Tesla, which has won the hearts of countless investors following a close to 13,000% share-price increase over the trailing decade. Tesla has been able to do what no other automaker successfully did for over five decades -- build an auto company from the ground up to mass production.
Somewhat keeping with the theme of this list, Tesla's "motor" is running on competitive advantages. The company's batteries provide better power, capacity, and range than much of its competition. Further, the addition of the Austin, Texas and German gigafactories should allow Tesla to maintain an EV-production advantage over even the most tenured auto stocks.
Another reason investors are bullish on Tesla is the company's income statement. Gone are the days where renewable energy credits were the only factor pushing Tesla into the profit column. The company generated a $3.74 billion adjusted profit in the first quarter, with automotive gross margin jumping more than six percentage points to 32.9%.
The issue with Tesla is that its competitive-edge runway won't last forever. Legacy automakers are investing tens of billions of dollars to roll out dozens of new EVs and autonomous vehicles this decade. We've already started to see instances where Tesla's flagship sedans (the Model 3 and Model S) are taking a back seat to the competition, at least from a range perspective.
Additionally, CEO Elon Musk has become just as much a liability for Tesla as a visionary. Musk has a habit of overpromising and underdelivering when it comes to innovation. His social media escapades are also a distraction.
Image source: Getty Images.
The best stock-split stock to buy right now is...?
Now that we've taken a closer look at the pros and cons of owning three of the largest stocks on the planet, let's return to the key question at hand: Which stock-split stock, among Alphabet, Amazon, and Tesla, is the better buy right now?
In my view, Tesla is the one stock that can be easily eliminated. Auto stocks traditionally trade at single-digit price-to-earnings multiples. Even though Tesla is more than just an automaker -- it provides a wide range of solar and energy storage/battery solutions -- it makes little sense why the company is valued at close to 60 times Wall Street's forecast earnings in 2022. This premium makes even less sense when you consider what a distraction Elon Musk has become to Tesla's long-term story.
That leaves Amazon and Alphabet. And it's really hard to choose between these two.
Amazon is a company that has all the tools and intangibles to become the world's largest publicly traded company. It's also historically inexpensive relative to what Wall Street anticipates it'll be generating in cash flow by 2024.
However, with Amazon reinvesting a lot of its cash, the company's bottom line may continue to suffer -- at least in the short run. That could be a detriment with the Nasdaq Composite in bear market territory -- which is why I believe Alphabet is the best stock-split stock to buy right now.
With Alphabet, investors are getting a company with sustained double-digit growth that's valued at less than 18 times Wall Street's forecast earnings for 2023. The company is also sitting on nearly $140 billion in cash, cash equivalents, and marketable securities, compared to just $14.8 billion in long-term debt.
Excluding cash, Alphabet's forward-year earnings multiple drops to 14. That's incredibly cheap, and an impressive downside buffer in a volatile market.
