It's not unusual for retail investors to get excited when companies announce stock splits since these have the effect of making their shares seem more affordable. Recently, Amazon (AMZN 1.30%) and Alphabet (GOOGL 1.27%) (GOOG 1.25%) have each been capturing headlines because of their respective stock splits. Amazon's 20-for-1 stock split, which took effect on June 6, means its shares are now trading for one-twentieth of their pre-split value. Similarly, Alphabet announced a 20-for-1 split which will go into effect as of the end of trading on July 15.
Amazon and Alphabet are dominant forces in the cloud and advertising industries, respectively. That fact, along with inexpensive valuations, offers a more compelling reason to invest in either or both of these companies than just their stock splits.
What a stock split means for investors
Basically, nothing much. That's because a stock split does not change investors' ownership percentages. If you own 50 shares of a company that performs a 10-for-1 stock split, your 50 shares will turn into 500. But you'll still own the same total percentage of the company as you did before the split, and you'll still be entitled to the same proportion of its earnings.
Fortunately for investors, Amazon and Alphabet's net earnings have thrived over the previous decade, as seen in the chart.
Data by YCharts.
Cloud services: Amazon vs. Alphabet
In its most recent quarter ending on March 31, Alphabet earned $5.8 billion in revenue from cloud services, up 45% from the year-ago quarter's $4 billion. The segment is not yet profitable, with Alphabet losing $931 million in operating income, a slight improvement from its $974 million in operating losses in the year-ago quarter.
On the other hand, Amazon's cloud services segment reported revenue of $18.4 billion in its quarter that ended on March 31, up 37% year over year. But while Alphabet lost money on its own operations, Amazon's cloud services segment generated an operating income of $6.5 billion -- more in profit than Alphabet brought in as revenue.
Though Amazon's outpacing Alphabet in cloud computing, both companies' robust sales growth is an attractive feature for investors. Business spending on cloud services totaled $495 billion in 2021 and is expected to grow for several more years. Unlike the stock split, this trend could increase both companies' shareholder returns in the long run.
Data by YCharts.
Advertising: Amazon vs. Alphabet
In the quarter that ended in March, Alphabet generated $54.6 billion in advertising revenue across Google and YouTube, up 22.4% year over year. From that total, Alphabet earned an operating income of $22.9 billion, up from $19.5 billion in the year prior.
That flips the script, as Amazon trails Alphabet considerably in advertising revenue, with just $7.9 billion in its quarter ended in March. That represented a 25% gain from the year prior, so at least Amazon can boast faster ad revenue growth.
Advertisers spent $763 billion globally in 2021, a 22.5% increase from 2020. Amazon boasts hundreds of millions of shoppers on its platform, while Alphabet's Google is the world's leading search engine. Each company gives marketers a compelling reason to allocate a meaningful share of their budgets, or risk missing out on a massive group of shoppers. This is another powerful reason to invest in Amazon and Alphabet.
Cloud services and advertising revenue are compelling reasons to buy
Data by YCharts.
While the stock split news may have attracted your attention to Alphabet and Amazon, there are better reasons to buy the stocks. Alphabet is the dominant force in the $763 billion advertising industry. Amazon stands atop the $495 billion cloud services sector. Their positions of power have allowed them to expand net profits along with revenue.
Finally, this year's stock market sell-off has each of their stocks trading at reasonable levels when measured by their price-to-earnings ratios: 52 for Amazon and 20 for Alphabet, each trading at its lowest valuation in the last five years. That significant discount -- rather than the cheaper dollar amount created by their stock splits -- offers investors a far more compelling reason to consider these powerful players in their respective industries.
