Stock splits have been hot lately as some top companies have decided that dividing up their stocks into smaller portions will benefit the companies and their shareholders. Whether stock splits are advantageous to anyone is debatable, but historically, splitting the stock into smaller portions at cheaper prices does tend to achieve at least an initial jump in the price.
Amazon (AMZN -1.64%) and Shopify (SHOP -2.37%) both split their stocks in June, and both stocks are up around 10% since their respective stock splits as of this writing. Is it too late to buy in?
Getting back to double-digit growth
Amazon's growth has been disrupted by tough year-over-year comparisons and the same inflation and rising costs that every other retailer is facing. Revenue increased 7% in the second quarter of 2022, and the company posted its second net loss in a row.
But the market, which can be unpredictable, didn't seem to be bothered by this situation. Although Amazon stock has been down 16% in 2022, it's up 15% since its second-quarter report was released. Does that mean investors missed out on the upswing? I think quite the opposite. The stock gain is indicative of investor confidence in Amazon's potential.
High on the list of what to be confident about is Amazon Web Services (AWS). Amazon's cloud computing division continues to deliver blowout results, reaping a 33% year-over-year revenue increase in the second quarter and a 37% increase in operating income. This lean machine is attracting business from major players in every field of industry, and the company keeps laying the groundwork for more.
As for retail, it's hard to compete with Amazon at this point. On Prime Day, members purchased 100,000 items per minute. Amazon is offering more and more perks for its engaged community, such as a free one-year Grubhub membership. It's adding more features for all shoppers, such as virtual try-on technology. One new service to keep an eye on is its drone delivery system, which Amazon is launching in parts of California and Texas.
And then there are all the rest of the ways Amazon is dominating U.S. commerce, such as its devices, cashier-less technology for physical stores, streaming channels, and healthcare.
After two quarters of single-digit revenue growth, management is guiding for a 13% to 17% increase in the third quarter. Economic headwinds mean operating income is likely to be pressured in the near term. But investors are pushing the stock higher on the long-term perspective.
Picking up from where it left off
It's interesting to juxtapose these two companies since they released second-quarter earnings around the same time. Amazon's report was more or less shrugged off, while Shopify stock fell before going back up.
Unlike Amazon, Shopify is still firmly in growth territory, net losses included. The pandemic, though, accelerated it through what would have been several years of growth as companies were forced to get online so consumers could shop there. That was useful at the time, but it has proven to be unsustainable.
Shopify stock gained nearly 200% between March 2020 and January of this year, before things began to head south. It's unsurprising that investors are punishing it now that Shopify can't keep up the extraordinary growth it was demonstrating at the peak of restrictions. However, a 70% drop this year does seem severe for a company that's still building on top of last year's soaring growth.
Part of that is due to the operating results, which reverted to a loss after the company had become very profitable. Expenses are increasing as costs rise, outpacing the increase in revenue. The outlook for the rest of the year is still pressured, but the second half looks to be better than the first, and the fourth quarter is expected to be better than the third.
The second quarter was mixed. Revenue increased 16% over last year, monthly recurring revenue increased 13% as more clients joined the platform, and gross merchandise volume increased 11% year over year despite cutbacks in customer spending. Earnings per share swung from $0.71 last year to a loss per share of $0.95.
The big unknown is how fast Shopify can get back to positive earnings. The good news is that even though management called this a "transition year" as it fully digests the unprecedented pandemic growth, the opportunity is still massive -- it's just slower-growing. Global e-commerce sales are expected to hit more than $5.5 trillion in 2022, a 13% increase from last year, and $7.4 trillion by 2025. Shopify is firmly placed to benefit from those trends, and when the economy rebounds, it's likely to keep growing as costs stabilize, eventually returning to profitability.
Even at the current price, however, Shopify stock isn't cheap, trading at 11 times trailing 12-month sales. That's growth-stock territory. Shopify has tons of future potential, but it might take a while to become profitable and post increased growth rates. Even so, confident investors are already nudging the price back up, and if you can focus on the long term, you're likely to see good gains.
