Big news events have dominated Wall Street in 2022. We've witnessed the S&P 500 deliver its worst first-half of a year since 1970, endured the energy supply chain challenges caused by Russia's invasion of Ukraine, and are contending with historically high domestic inflation of 9.1%, as of June 2022.
Yet among these headlines, investors have become enamored with the idea of companies announcing and executing stock splits. A stock split allows a publicly traded company to adjust its share price and outstanding share count without impacting its market cap or operations.
Image source: Getty Images.
In many instances, stock splits are viewed favorably by Wall Street and investors. They make a company's shares more nominally affordable for retail investors and wouldn't be necessary in the first place if a company weren't executing well and out-innovating its competition (and having its share price climb, as a result).
But not all stock-split stocks are created equally. Among the dozens of companies that have split their shares or announced a split year to date, two stand out as no-brainer buys, while another looks entirely avoidable.
Stock-split stock No. 1 to buy hand over fist: Amazon
To start with, investors can confidently buy shares of e-commerce giant Amazon (AMZN -1.35%) hand over fist. Amazon announced its intent to split its shares 20-for-1 in March and followed through by splitting its shares in early June. Whereas a single share of Amazon could have set an investor back more than $3,700 in November, a single share could be purchased for less than $123, as of July 20, 2022.
Like most high-growth companies, Amazon is working its way through a flurry of headwinds as the Federal Reserve aggressively raises interest rates in response to historically high inflation. Amazon generates the bulk of its revenue from its leading online marketplace, so there's clear concern, at least in the short term, that Amazon's retail operations could be a drag on its bottom line.
However, short-term headwinds shouldn't scare investors away from a proven winner that could, one day, become the largest publicly traded company in the world.
Let's start with Amazon's online retail operations, which define dominance. In a report from eMarketer, which was released in March, proves accurate, Amazon will account for just shy of 40% of all online retail sales in the U.S. this year. For context, that's more than 8 percentage points higher than No. 2 through No. 15 in U.S. online retail sales market share, combined.
But as I've previously stated, what's far more impressive is Amazon's ability to pivot its online-marketplace dominance into Prime subscriptions. Last year, Amazon noted that it had more than 200 million Prime subscribers worldwide. The tens of billions in annual revenue collected from Prime members allows Amazon to invest in its logistics network and other high-growth initiatives.
Speaking of high-growth initiatives, Amazon also happens to be the world's leading cloud infrastructure service provider. Amazon Web Services (AWS) accounted for 33% of global cloud service spending in the first quarter, according to a report from Canalys. Cloud growth is, arguably, still in its very early innings. What's more, cloud service margins are considerably higher than online retail operating margins. Even if Amazon's retail sales stagnate for years, its operating cash flow could double or triple by mid-decade, solely because of growth in AWS, subscriptions, and advertising.
Amazon is historically inexpensive relative to Wall Street's operating cash flow estimates, which makes it such a no-brainer buy.
Stock-split stock No. 2 to buy hand over fist: Alphabet
The second stock-split stock that's a screaming buy for patient investors is FAANG stock Alphabet (GOOGL -1.82%) (GOOG -1.80%), the parent company of internet search-engine Google and streaming-platform YouTube. Alphabet declared its intent to enact a 20-for-1 stock split in February and followed through by splitting its shares earlier this week.
Like Amazon, Alphabet is contending with the growing likelihood of a recession in the United States. Because most of Alphabet's revenue is generated from advertising, and ad revenue tends to be among the first things to be hit when recessions arise, there's clear worry that Alphabet's foundational segments could hit a rough patch in the short run.
But the key phrase here is "short run." Even though recessions are inevitable, periods of economic expansion last disproportionately longer than contractions. This has allowed internet search-engine Google to consistently grow by a double-digit percentage for the past two decades, with few exceptions.
In addition, Google has transformed into nothing short of a global monopoly. Over the previous 24 months (ended June 2022), Google has controlled 91% of worldwide search-engine market share, as per GlobalStats. With no other search engine within 88 percentage points of Google, Alphabet has been able to command superior pricing power for ad placement.
The great thing about having a veritable monopoly is that Alphabet is able to reinvest the operating cash flow from Google into an assortment of high-growth initiatives. For instance, YouTube is bringing in 2.56 billion monthly active users, which is good enough for No. 2 among social media sites. Alphabet has access to more than 2.5 billion monthly active users, which has boosted YouTube ad sales and its recurring subscription revenue.
Alphabet is enjoying rapid growth from cloud infrastructure services, as well. Google Cloud is the world's No. 3 cloud service provider, with Alphabet taking 8% of global share during the first quarter. Although reinvestment in Google Cloud has thus far weighed on Alphabet's results, there's a good chance this operating segment could become its leading cash flow generator within five years.
Like Amazon, Alphabet is historically inexpensive. Shares can be purchased for less than 18 times Wall Street's earnings forecast for 2023, and the company is sitting on a whopping $134 billion in cash, cash equivalents, and marketable securities. At this moment, there may not be a better value among the FAANGs.
A Tesla Model S plugged in for charging. Image source: Tesla.
The stock-split stock you'd be wise to avoid: Tesla
On the other end of the spectrum is a widely owned stock-split stock that I believe would be best avoided. I'm talking about electric-vehicle (EV) manufacturer Tesla (TSLA -5.59%), which previously announced plans to enact a 3-for-1 stock split. Tesla shareholders will vote to approve or deny the split at the company's annual shareholder meeting on Aug. 4, 2022.
Before diving into the assortment of reasons to avoid Tesla, let's clear the air: Tesla didn't become one of the largest companies in the world by accident. Wall Street and investors have clearly been impressed with the company's ability to grow its EV line into mass production, which no other automaker has done from a ground-up basis in over five decades. Even with reduced output in the second quarter tied to supply chain challenges and COVID-19-related shutdowns at the Shanghai gigafactory, Tesla still looks like it's on track to deliver more than 1 million EVs in a year for the first time ever.
Investors are also quite enamored with CEO Elon Musk. The outspoken Musk has delivered four models to the Tesla lineup and has diversified the company's operating model to include batteries and energy storage.
But in many instances, the negatives often outweigh the positives with Tesla. Elon Musk is the perfect case in point. He's drawn the ire of the Securities and Exchange Commission on more than one occasion, and his potential acquisition of social media network Twitter has turned into a huge distraction.
Yet the biggest beef with Musk might be his inability to deliver on his vision in a timely manner. Although Tesla does have a four-vehicle lineup, Cybertruck deliveries have been delayed until mid-2023, the all-electric Semi has been pushed back multiple years, not a single robotaxi has made it onto public roads, and full self-driving cars continue to be nothing more than a pipe dream. Whereas most business leaders underpromise and overdeliver, Musk has a maddening habit of doing the opposite.
Another clear concern is that competitors are beginning to gain ground on Tesla. Legacy automakers have big pocketbooks and existing infrastructure that could quickly close the production gap with Tesla. Interestingly, some of the newer EV makers are giving Tesla a run for its money in the battery-range department. The point is that Tesla's range, power, and capacity advantages are dwindling.
As one final concern, despite Elon Musk tweeting in May 2021 that his company would effectively "diamond hand" its Bitcoin holdings, Tesla sold approximately three-quarters of its Bitcoin during the second quarter. While it was made clear that this was due to uncertainty surrounding the Shanghai gigafactory shutdown, it's extremely worrisome that Tesla's capital position may be so precarious that it was coerced to unload more than $900 million worth of Bitcoin.
Considering that most automakers are valued at a single-digit forward-year price-to-earnings ratio, Tesla looks highly unappealing at roughly 47 times Wall Street's forecast earnings in 2023.
