It's been an eventful year on Wall Street. Inflation hit a four-decade high of 9.1% in June 2022, Russia invaded Ukraine and further disrupted crude oil and natural gas supply chains, and both the benchmark S&P 500 and growth-driven Nasdaq Composite decisively fell into bear market territory with peak-to-trough declines of 24% and greater than 30%, respectively.
Despite this turmoil, investors have seemingly turned all of their attention to companies announcing and enacting stock splits. A stock split is a way for a publicly traded company to alter its share price or outstanding share count without impacting its market cap or operating performance. It's an especially useful tool to make a company's share price more nominally affordable for everyday investors who don't have access to fractional-share purchases with their online broker.
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Stock-split euphoria has gripped Wall Street
Stock splits -- specifically forward stock splits, which reduce the share price of a company while simultaneously increasing its share count by an equal magnitude -- are generally viewed as a positive by the investing community. In other words, a company wouldn't be announcing a stock split if its share price hadn't soared as a result of outstanding execution and out-innovating its competition.
Since February 2022, dozens of stock splits have taken place, with five high-profile forward-stock splits standing out:
- Alphabet (GOOGL -1.23%) (GOOG -1.10%) announced plans to conduct a 20-for-1 stock split in early February and, with shareholder approval, completed this forward split on July 18, 2022.
- Amazon (AMZN -2.56%) also declared its intent to conduct a 20-for-1 split in March and completed this split on June 6, 2022.
- Dexcom (DXCM -2.67%) announced a four-for-one stock split in late March that was approved by shareholders in May. The split took effect on June 10, 2022.
- Shopify (SHOP 0.23%) reported its plan to execute a 10-for-1 stock split in April, with the split coming to fruition on June 29, 2022.
- Tesla (TSLA -1.92%) revealed plans for a three-for-one stock split in June, which would be its second split in about two years. Shareholders are set to vote on this proposal at the company's shareholder meeting on Aug. 4, 2022.
Industry leaders and innovators are prime stock-split candidates
There's no hidden secret as to why these five companies have already split their shares or desire to: They're industry leaders and/or disruptors.
- Alphabet is the internet search kingpin, has one of the most-visited social media sites on the planet in YouTube, and has seen Google Cloud grow into the world's No. 3 cloud infrastructure service provider.
- Amazon is slated to account for nearly 40% of U.S. online retail sales this year, which is more than its 14-closest competitors on a combined basis. The company has signed up more than 200 million Prime members worldwide, and its cloud service, Amazon Web Services, is the world's leading infrastructure service provider.
- DexCom is one of the two largest domestic players in continuous glucose monitoring systems. The number of type 2 diabetics and adults with prediabetes in the U.S. continues to climb, providing DexCom with a sustained double-digit growth opportunity in any economic environment.
- Cloud-based e-commerce platform Shopify is just scratching the surface with regard to its $153 billion addressable market tied to small businesses. The addition of buy now, pay later services (Shop Pay) gives merchants even more reason to choose Shopify to grow their business.
- Tesla was the first automaker in over five decades to successfully build itself from the ground up to mass production. The company is on pace for more than 1 million electric vehicle (EV) deliveries this year and offers a number of competitive edges in the EV space over legacy automakers.
Yet, among these five stock-split stocks, one is, hands down, a much smarter buy than the rest.
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This stock-split stock is the smartest buy right now
If you had money in your hand right now and you were told there's only one stock-split stock you can buy, I'd tell you that Alphabet is where you should unquestionably put your money to work.
The biggest issue with Amazon, Tesla, Shopify, and DexCom are their valuation premiums. These premiums leave all four stocks susceptible to downside during bear market swoons and corrections. As you're about to see, Alphabet is historically inexpensive and ripe for the picking among stock-split stocks.
For more than two decades, internet search engine Google has been Alphabet's foundational operating segment. For the trailing 24 months, Google has accounted for a monopoly like 91% to 93% of global internet search market share. With the nearest competitor more than 88 percentage points behind it, no investors should be surprised that Alphabet commands exceptional ad-pricing power, or that Google has consistently grown annually by a double-digit percentage, with few exceptions, for decades.
But as I've previously pointed out, it's not just about internet search. Even though this segment continues to be a cash cow for Alphabet, all eyes are on the company's faster-growing initiatives. YouTube, for instance, has become the second most-visited site in the world, with 2.56 billion monthly active users. As you can imagine, this has helped draw in advertising and subscription revenue, and may help YouTube push above a $30 billion annual sales run-rate by the end of the year.
As noted, there's also Google Cloud, which accounted for 8% of worldwide cloud infrastructure service spending during the first quarter, according to Canalys. Despite Google Cloud losing Alphabet money at the moment, the higher margins often associated with cloud services should become a leading cash flow driver by the midpoint of the decade.
But what makes Alphabet such a no-brainer buy right now is its valuation and balance sheet. Whereas the other stock-split stocks are trading at nosebleed price-to-earnings ratios for the upcoming year, investors can scoop up shares of Alphabet for an extremely reasonable multiple of 20 times Wall Street's forecast earnings. Mind you, this is a company where 15% to 20% annual sales growth has become the norm.
To add, Alphabet ended June 2022 with $139.6 billion in cash, cash equivalents, and marketable securities, relative to just $14.8 billion in long-term debt. If you remove the net cash from the equation, Alphabet is even cheaper relative to its 2023 earnings forecast. No stock-split stock offers a safer floor with impressive upside quite like Alphabet.
