Wall Street and investors have been hit with a flurry of news events in 2022, including historically high inflation and Russia's invasion of Ukraine. Yet amid this market volatility, the investing community has become fixated on companies announcing and enacting stock splits.
A stock split is a way for a publicly traded company to alter its share price and outstanding share count without affecting its market cap or operating performance. A forward stock split can be particularly helpful to retail investors who don't have access to fractional-share investing. The execution of a split can lower the nominal-dollar cost to purchase a single share of stock.
Image source: Getty Images.
In general, stock splits are viewed as a positive event within the investing community. Think of it this way: A company's share price wouldn't be high enough to command a split if the company in question weren't executing well and out-innovating its competition.
Since February, e-commerce kingpin Amazon (AMZN -0.16%), internet search giant Alphabet (GOOGL -0.30%) (GOOG -0.21%), electric-vehicle (EV) manufacturer Tesla (TSLA -2.71%), and cloud-based e-commerce platform Shopify (SHOP 0.19%) have all announced stock splits. The prevailing question is, which of these stock-split stocks makes for the better buy right now?
Should you load up on Amazon?
First up is Amazon, which announced a 20-for-1 stock split in March and executed that split on June 6, 2022.
If there's a knock against Amazon, it's the growing likelihood of a recession in the United States. The bulk of Amazon's revenue comes from its online marketplace. If retail sales were to shift into reverse, Amazon's lofty price-to-cash-flow ratio would stick out like a sore thumb in a declining market.
There's plenty to like here, whether we're focused on Amazon's leading retail segment or its ancillary operations. For instance, a March 2022 report from eMarketer estimates that Amazon will account for nearly 40% of all online U.S. spending this year. Even as a low-margin operating segment, this online retail dominance has helped Amazon sign up more than 200 million Prime subscribers worldwide. The fees Amazon collects from its Prime members help to fuel investments in its logistics network and allows the company to undercut brick-and-mortar retailers on price.
Even more exciting than its leading online marketplace is Amazon Web Services (AWS). According to data from Canalys, AWS accounted for a third of global cloud infrastructure spending during the first quarter. With cloud service growth still in its early innings, AWS looks to be Amazon's golden ticket going forward.
Could your search end with Alphabet?
The next stock up is Alphabet, the parent company of internet search-engine Google and streaming-platform YouTube. Alphabet announced plans to conduct a 20-for-1 split back in February and will make good on those plans as of tomorrow, July 15, which is when its stock split will officially take effect.
Like Amazon, the biggest worry with Alphabet is that a near-term recession could derail its core business. Since a majority of Alphabet's revenue is derived from advertising, and ad revenue is one of the first things to be hit during a recession, there remains a very real concern that a weakening U.S. and/or global economy could send shares of this megacap stock lower (stock split or not).
But also like Amazon, Alphabet brings its fair share of competitive advantages to the table. For example, data from GlobalStats shows that Google has controlled no less 91% of worldwide internet search share over the trailing-24-month period. Having a practical monopoly on internet search makes it easy for Google parent Alphabet to command top dollar for ad placement.
But this is a company that's about far more than just internet search these days. YouTube has become the second-most-visited social site on the planet, while Google Cloud has grown into the world's No. 3 cloud infrastructure service provider. There's a good chance Google Cloud could become Alphabet's leading operating cash flow driver by the midpoint of the decade.
Should you stomp the accelerator with Tesla?
EV-maker Tesla is the third company aiming to take advantage of stock-split euphoria. Having already split its shares 5-for-1 in August 2020, Tesla is seeking shareholder authorization to split its shares 3-for-1 at its upcoming annual meeting on Aug. 4, 2022.
If there's a red flag with Tesla, it may well be the company's innovative CEO, Elon Musk. Although Musk is a visionary, he's proved to be a liability for the company on more than one occasion. He's frequently overpromised and underdelivered new technology, and more recently, he's been occupied by the idea of acquiring (or not acquiring) social media site Twitter. Without Musk fully involved in Tesla's operations, it's not difficult to see competitors catching up from a production and performance standpoint.
Then again, Tesla did something no other automaker has done in over five decades: build itself from the ground up to mass production. Tesla looks like it's well on its way to surpassing 1 million vehicles produced this year, even with semiconductor-chip shortages and supply chains remaining challenged by the COVID-19 pandemic.
Tesla's competitive advantages could be difficult to topple, as well, thanks to ongoing innovation. Few EV manufacturers have, thus far, come close to competing with Tesla with regard to battery power, range, or capacity.
Is Shopify worth adding to your cart?
The fourth ultra-popular stock-split stock is cloud-based e-commerce platform Shopify. The company announced plans to conduct a 10-for-1 stock split in April and began trading at its post-split price on June 29, 2022.
Not to sound like a broken record, but the biggest concern for Shopify is similar to that of Amazon and Alphabet -- the growing threat of a recession. Shopify is counting on small-business growth to drive subscription demand and payment volume on its platform significantly higher. If economic activity falters, it would expose Shopify's lofty valuation multiples.
The good news for Shopify is that it has an exceptionally long runway to grow its operations. According to a company presentation in 2021, Shopify is sitting on a $153 billion addressable market solely from small businesses. This doesn't even factor in the company's numerous wins with bigger businesses in recent quarters.
Reinvesting in Shopify's ecosystem can pay sizable dividends, as well. Last year, Shopify launched its own buy now, pay later (BNPL) service, known as Shop Pay. A BNPL service offers its merchants more financial flexibility, and it's allowed Shopify to gobble up a sizable percentage of U.S. BNPL market share.
Image source: Getty Images.
And the better stock-split stock to buy right now is...
Now that you've had a closer look at four highly popular stock-split stocks, we can return to the question at hand. Among Amazon, Alphabet, Tesla, and Shopify, which stock-split stock is the better buy right now?
In my view, two of these four names can be eliminated right off the bat. First, we can get rid of Tesla due to the diversion created by Elon Musk, as well as the company's lofty premium to earnings. Most automakers tend to trade at a single-digit price-to-earnings ratio. With traditional automakers spending billions on EV and autonomous research, it seems unlikely Tesla will hang onto its competitive advantages for much longer.
I believe we can eliminate Shopify, as well. While I believe Shopify has a bright future over the very long term, retail-oriented businesses could struggle mightily until the nation's central bank has completed its rate-hiking cycle. It's also not entirely clear how BNPL services will fare during a period of economic weakness. Even with Shopify more than 80% below its all-time high, it's still quite pricey at close to 135 times Wall Street's forecast earnings for 2023.
This effectively brings it down to Amazon versus Alphabet -- and we've been here before. While I believe both companies should be expected to outperform the broader market over the long run, it's Alphabet that stands out as the smarter stock-split stock to buy.
Even if Alphabet's advertising business takes a hit in the near term, the company's historically inexpensive valuation (just 17 times Wall Street's forward-year consensus earnings) provides a healthy downside buffer that these other stock-split stocks don't offer. In fact, Alphabet becomes even cheaper if you back out its $134 billion in cash, cash equivalents, and marketable securities.
If you're looking for safety and upside among stock-split stocks, Alphabet is where you'll find it.
