After benefiting from years of outsize gains, many companies have turned to stock splits to make shares appear more affordable. Stock splits do not directly add to shareholder wealth. One hundred shares at $100 per share hold the same value as 1,000 shares at $10 per share.
However, lower nominal stock prices can increase liquidity and make whole shares more affordable to small investors. This increased interest could give an added boost to Amazon (AMZN -4.91%), DexCom (DXCM -0.54%), and Shopify (SHOP -3.10%).
Long-term investors should pounce on this mega-cap mainstay while it's on sale
Jake Lerch (Amazon): For Americans today, it's almost impossible to pass 24 hours without interacting with an item that was delivered, marketed, built, or otherwise supported by Amazon's various business segments. The tech behemoth's annual revenue of $477 billion ranks second only to Walmart's $576 billion. However, despite its size and significance, Amazon has experienced a dismal 2022, driven by numerous setbacks:
Nevertheless, investors shouldn't dismiss Amazon as past its prime. True, the stock is down 33% year to date, and the U.S. economy could well be headed for a recession in the not-too-distant future. Yet, some prospective catalysts might help Amazon turn things around later this year, including:
- Its recent stock split.
- Amazon Web Services' robust growth rate.
- Increasing ad revenue.
- Positive impacts due to cost-cutting.
- Improving economic conditions brought on by lower inflation rates and revitalized supply chains.
Aside from the stock split, none of these is a given. But even if these scenarios don't revive the stock's fortunes in 2022, Amazon still remains a mainstay of the American economy. In fact, I've argued that Amazon is a proxy for the U.S. economy. And despite all the challenges that beset the U.S. economy today, I do not doubt it (and Amazon) will bounce back.
What makes Amazon even more attractive is that it's cheap by historical standards. Its current price-to-earnings ratio is 54.7 -- well below its long-term average and near its all-time low of 42, set earlier this year. Moreover, Wall Street is raising earnings estimates for 2023. Over the last 30 days, six firms have revised their EPS estimates higher, with only one lowering guidance. Investors would be wise to consider Amazon now, with the stock still trading much cheaper than where it started the year.
Say goodbye to painful and messy fingersticks
Justin Pope (DexCom): More than 500 million adults worldwide live with diabetes, a number that could grow to more than 780 million by 2045. Unfortunately, rising worldwide obesity rates have made diabetes increasingly prevalent.
Measuring blood sugar traditionally requires a fingerstick to draw a drop of blood, which can be painful and inconvenient for patients.
DexCom sells a continuous glucose monitoring system consisting of a sensor that patients wear for up to 10 days, which measures glucose levels and sends the data to a smart device every five minutes. Traditional blood testing only measures glucose at the moment; continuous monitoring is much more telling, like using video versus a photograph to tell a story.
You can see below how smooth DexCom's growth has been; it turns out that delivering a superior alternative in a big market creates good business outcomes. The company is also profitable, generating cash profits via free cash flow and bottom-line profit (net income).
DXCM Revenue (TTM) data by YCharts
DexCom won't blow investors away with hypergrowth; the company's revenue grew 25% year over year in the first quarter of 2022 to $629 million. Instead, the business is a steady grower, poised for years of double-digit growth. Remember how more than half a billion adults live with diabetes? DexCom sells to just 1.25 million, leaving an ocean of growth ahead.
Management recently completed a 4-for-1 stock split, dropping the share price to roughly $76 per share. Remember that stock splits make shares more affordable, but don't change the fundamental valuation of the stock itself. Therefore, metrics like the price-to-sales ratio (P/S) are helpful to look at. DexCom trades at a P/S of 12, about average for the company over the past decade.
DXCM PS Ratio data by YCharts
It might not be a screaming bargain, but there should be plenty of room for investors with a long-term approach willing to let that double-digit growth pile up over the coming years.
This bull case hinges on more than just a stock split
Will Healy (Shopify): Shopify's 10-for-1 stock split should increase the stock's appeal to small investors. However, investors shouldn't buy simply for the low nominal price.
Shopify has managed to stand out among e-commerce platforms with superior products and a large ecosystem. It invests in technology to deliver fast, reliable service and offers numerous task-related tools such as a logo maker and a QR code generator.
Its vast ecosystem includes tools such as a payments platform that accommodates transactions on all Shopify-supported sites. Its inventory management tools will also monitor inventories of goods sold both online and offline, making it more useful to many of its clients. Furthermore, Shopify Capital can provide its clients with funding when necessary.
Still, the ecosystem addition that may pull it permanently ahead of most peers is the Shopify Fulfillment Network (SFN). The SFN will store, package, and ship goods. Since most peers are tied to an identity as a software company, most will not follow Shopify into the fulfillment business. At best, they may contract fulfillment to an outside party, similar to Wix.com's arrangement with Amazon.
According to Oberlo, this ecosystem helped give Shopify a 32% market share among e-commerce platforms in the U.S., making it the No. 1 e-commerce platform in the country.
But despite Shopify's potential, the stock has lost nearly 80% of its value since November as growth rates slowed. The company brought in $1.2 billion in the first quarter of 2022, and the 22% year-over-year increase slowed from the 57% revenue growth in 2021. Also, Q1 losses came in at $1.5 billion due largely to $1.7 billion in unrealized equity losses.
However, Shopify expects a recovery in revenue growth in the second half of 2022. Additionally, the 10 P/S ratio is near a six-year low, making the stock more attractive to new investors. As Shopify continues to stand out with its tools and ecosystem, it looks more like a stock to buy now.
