Many popular companies have announced stock splits in 2022. The splits themselves may not change the value of these investments a whole lot, but they do signal that the board of directors expects prices to soar in the future. And in some cases, there really are significant reasons to split that market cap into thinner slices.
With that in mind, we asked a panel of Motley Fool contributors to share their top picks from the list of upcoming stock splits.
Cybersecurity still starts with the physical infrastructure
Nicholas Rossolillo (Fortinet): In the years leading up to and during the beginning of the pandemic, there was much talk about how cybersecurity needs have changed. Thank the advent of "the cloud" for that. As businesses have adapted to remote work and information has become available anytime and anywhere an internet connection can be found, security software that lives in the cloud has become a necessity.
But in its base functionality, cloud computing still starts with physical infrastructure -- in this case, a data center where an app, service, or data is housed and accessed via an internet connection. New cybersecurity software that protects the connection to a data center and the end-users accessing it is now required, "old school" security that protects a physical location is no less important today than it was a decade ago. That's why Fortinet (FTNT -1.50%) remains one of my favorite cybersecurity stocks.
The company just completed a 5-for-1 stock split on June 23. But the real reason I remain bullish on Fortinet (the stock is a market beater, up 3,320% since its IPO in 2009) is the soaring demand for its security hardware. The inexorable rise of cloud computing is creating a big upgrade cycle in data centers, and AI is spawning brand new data centers purpose-built for new applications that unlock new business efficiencies. Fortinet is a best-in-class provider of firewalls and other hardware that helps keep these physical assets secure.
What I really like about Fortinet, though, is that after it sells its hardware into an organization's IT framework, it continues to make money for years with its subscription services. In fact, as of Q1 2022, over 60% of Fortinet's revenue was from recurring services. Once its hardware is incorporated into a company's IT infrastructure, these recurring services are incredibly sticky. And with a foot in the door, Fortinet is able to cross-sell other security services it develops.
This has been an incredibly lucrative strategy over the years, and I think it will continue to pay off handsomely for Fortinet in the next decade. Shares currently trade for 39 times trailing-12-month free cash flow, a reflection of other investors' bullish sentiment as well. But I think the premium price tag is well deserved, assuming an investor plans to buy and hold for at least a few years and diversify with other top cybersecurity stocks.
Cash is king these days, so just buy Google
Billy Duberstein (Alphabet): Google parent Alphabet (GOOG -1.51%) (GOOGL -1.72%) is splitting its stock on July 15, and shares look very attractive today. Anchored by its dominant search engine that continues to grow at very high margins, Alphabet continues to invest heavily in newer businesses such as YouTube, the Google Cloud platform, and Android applications and devices.
Alphabet has the luxury of generating such large profits that it can afford to hire top data scientists, spend billions on research and development, and make acquisitions all at once. While regulation is currently a concern, most notably in Europe, Alphabet still appears able to make acquisitions to continue on its growth path and fill out its ecosystem. For example, Alphabet was able to buy Fitbit in 2021, and just announced an agreement to purchase cybersecurity company Mandiant for $5.4 billion in March.
Not only does the digital ads business allow Alphabet to invest heavily in new growth ventures, but excess profits allow Alphabet to return more cash to shareholders. Over the past few years, management has returned more and more to shareholders in the form of repurchases with each passing year, and just announced a $70 billion repurchase program on its first-quarter earnings release, good for about 5% of Alphabet's market cap today.
Currently, Alphabet trades at just 20 times earnings, which is near the lowest P/E ratio it's had since the 2008-2009 financial crisis, which by all accounts is a worse environment than the one we're in today. Moreover, Alphabet is even cheaper than that number would indicate. It has about 8% of its market cap in cash on its balance sheet, at $134 billion.
Second, its Cloud business is still losing money, with $931 million in operating losses last quarter, and Alphabet's "other bets" segment, which incorporates long-term "moonshot" projects such as Waymo self-driving cars, had operating losses of $1.2 billion. Together, those segments reduced operating income by about 9% last quarter, even though those businesses likely have significant positive value. Stripping out those money-losing businesses and the cash, and Alphabet's core ads and Android services are trading for a mid-teens multiple.
Image source: Getty Images.
Alphabet could see a slowdown in the core business this year if we go into a downturn, but the digital ad space is set to grow over the long term, and Alphabet should benefit. Moreover, recent interest rate hikes could actually enable Alphabet to generate more interest income on its cash. For instance, the one-year Treasury rate has surged by about 2.5 percentage points this year off of near-zero levels, as the Federal Reserve has rapidly raised rates.
If Alphabet puts its $134 billion into one-year Treasuries, that's an extra $3.3 billion in interest income it can make. Alphabet made $76 million in net income last year, so higher interest rates could theoretically increase its income by about 4% this year alone. That could help offset some marginal weakness if there is an advertising slowdown.
Basically, it's a good environment for cash-flowing stocks with lots of cash around to take advantage of opportunities, and Alphabet has that in spades.
This 10-for-1 stock split makes a serious difference
Anders Bylund (Nintendo): In most cases, I don't get terribly excited about stock splits. Dividing the same ownership stake into a larger number of more narrow slices doesn't really add any value for the shareholder, after all. However, I'm quite excited about Nintendo's (NTDOY -1.28%) upcoming 10-for-1 split. You see, the video game expert will actually achieve something with this split.
If you peek behind Wall Street's curtain, stocks are generally bought and sold in round lots of 100 shares. Once upon a time, stock brokers imposed that as a rule for ordinary investors. Odd-lot orders that don't involve share counts divisible by 100 still seem funny to some market heavyweights, and people have set up trading strategies to take advantage of the peculiarities of small or unpredictable order sizes.
Brokerages don't enforce this as a rule on the orders you place, and most trading platforms are even happy to buy and sell a fraction of a high-priced share. Hence, stock splits generally don't make any real difference in trading patterns and investor reach in America.
Things are different in Japan. On the Tokyo Stock Exchange, stocks are still traded in batches of 100 shares. So when Nintendo trades at 57,840 Japanese yen ($428) per share, a minimal investment costs roughly $42,800 plus trading fees. Nintendo is putting its stock within reach of a much larger investor group when the stock splits 10-for-1 on Oct. 1.
Currently, the Tokyo-based Nintendo shares are the exclusive domain of institutional investors and other extremely well-heeled market makers. Though it's still a stretch for some people with a minimum investment of approximately $4,280, this change will make Nintendo far more accessible to ordinary investors.
The theory is that the stocks' liquidity will increase amid wider investor interest, potentially driving share prices higher in the long run. Even if that idea doesn't exactly work out, I'm in favor of making investments available to a wider demographic.
Furthermore, Nintendo is a robust company that tends to adjust to changing target markets -- and often drives those changes with innovative ideas like the Wii motion controller and the handheld living-room system called Switch. And the stock is down 26% over the last 52 weeks, trading at just 14 times trailing earnings.
Put it all together, and you get a long-term winner using a stock split to put its stock in the hands of many more investors. That's a smart move in my book.
