Stock splits have been all the rage recently despite having few fundamental benefits. When a company splits its stock, one share breaks into two or three, or, in Alphabet's (GOOG -1.96%) (GOOGL -1.97%) case, 20 when its 20-for-1 split takes place in mid-July. Although the idea of receiving 20 shares for each share held is compelling, this means nothing if the company's business isn't headed in the right direction.
A stock split alone shouldn't be the basis for an investor to consider buying in. However, the fundamentals of some companies splitting their stock are appealing. Shopify (SHOP -2.37%) and Alphabet look especially exciting today, but which one is right for you? For many investors, the better stock-split stock to own might depend on your risk tolerance.
Alphabet is a dominant force in the advertising industry
Parkev Tatevosian (Alphabet): There is arguably no more dominant business worldwide than Alphabet's Google search engine. The service commands an 85.5% market share. What's more, that's not Alphabet's only business segment. YouTube boasts 2.6 billion monthly active users. The two have undoubtedly helped Alphabet grow its revenue from $46 billion in 2012 to $257 billion in 2021.
An added benefit of having businesses with significant market shares is that a company can request and receive higher prices. Premium prices work to boost profit margins, and Alphabet has been no exception to this rule; its operating profit margin expanded to 30.6% in 2021. Operating income rose from $13.8 billion to $79 billion in the last decade.
Despite its enormous size, Alphabet has room to expand further. Marketers spent $763 billion in 2021, 22.5% more than in 2020. More of that budget is allocated to digital channels -- up to 64.4% in 2021, up from 52.1% in 2019. Digital ads deliver a higher return on investment to marketers because they can be automated, targeted, and more easily measured. With Alphabet's strength in users and control of the digital market, advertisers and marketers are likely to look to this behemoth first.
Oh, and by the way, Alphabet is expanding into the cloud services business. In its most recent quarter, which ended March 31, its cloud services business grew by 45% year over year. Spending on cloud services will reach an estimated $495 billion in 2022. Alphabet's rapid growth in a massive industry is great news for investors.
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Making the case more compelling is Alphabet's relatively cheap valuation. It's trading at near its lowest price-to-earnings and price-to-free-cash-flow ratios in the last decade. Alphabet has a solid mix of dominant and growing businesses operating in massive industries and is selling at a bargain price.
The opportunity that lies ahead for Shopify
Jamie Louko (Shopify): What Shopify lacks in industry dominance it makes up for with its prospects in the e-commerce space. While it might not be a preeminent force like Alphabet, Shopify has one of the best product suites for businesses to build, operate, and grow their e-commerce presence.
Importantly, Shopify's potential is plentiful: It sees a total addressable market of $160 billion ahead of it, and considering the company has made just $4.8 billion in trailing-12-month revenue, there is plenty of room to explode higher. Comparatively, Alphabet is already a $1.4 trillion company, which doesn't appear to leave much room for growth over the next decade.
Shopify's wide-reaching product suite, which includes everything from payment processing to short-term capital loans to marketing, is loved by businesses of all sizes. Shopify also has more than 8,000 apps for merchants that extend their product capabilities. This has attracted millions of merchants worldwide, and Shopify merchants made up more than 10% of U.S. retail e-commerce sales in 2021.
The company's operating loss in Q1 was $98 million, but that is because it is investing heavily in fueling growth for the long term. One of the most exciting projects is the Shopify Fulfillment Network, a logistics network that streamlines returns, fulfillment, and product storage for merchants, all handled by Shopify. This will allow the small businesses that use Shopify to compete with bigger retailers, making Shopify more attractive than ever to up-and-coming e-commerce businesses.
Shopify isn't immune to an economic downturn, so shares have taken a hit due to fears of a possible recession in the U.S. However, this drop has brought the company down to a bargain price. At the time of writing, shares trade at just 8.4 times sales -- the cheapest valuation in nearly six years. Shopify's potential is multiples higher than Alphabet's, and you can get this promising company at its lowest valuation in a long time. That makes it an incredibly appealing stock to own right now even with looming macroeconomic uncertainties.
The better buy?
While both companies offer attractive growth opportunities, the better buy depends on your risk tolerance. For investors who take a diversified, long-term approach to investing and have both the time horizon and stomach to handle volatile swings in the stock price, Shopify might be the stock for you. For less risk-tolerant investors, however, Alphabet might be more appealing. Whichever stock you choose, however, you can feel confident that you are getting a high-quality business at a great price.
