It's been a busy year on Wall Street. Investors have contended with the highest U.S. inflation rate in four decades (9.1% in June 2022), Russia invading Ukraine and throwing a monkey wrench into global oil and gas supply, and the U.S. economy delivering back-to-back quarters of gross domestic product (GDP) declines. Although the U.S. isn't officially in a recession -- an eight-person panel of economists makes that call -- two consecutive quarters of GDP declines is commonly viewed by the investing community as a "technical recession."
Yet in spite of this economic and stock market turmoil, investors have been borderline obsessed with stock-split stocks. A stock split allows a publicly traded company to alter its share price and outstanding share count without impacting its market cap or operations.
A forward stock split can lower a company's share price to make it more nominally affordable for investors without access to fractional-share purchases. A reverse stock split can lift a company's share price to ensure it meets the minimum share-price requirement to remain listed on a major exchange.
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Since the year began, dozens upon dozens of stocks have split their shares. Among these numerous stock-split stocks are two companies that have never been cheaper, as well as one that's a value trap to avoid like the plague.
Stock-split stock No. 1 to buy hand over fist: Amazon
One widely held stock that was long overdue for a split and appears cheaper than it's ever been as a public company is e-commerce stock Amazon (AMZN 3.37%). The company announced a 20-for-1 forward split in March and, with shareholder approval, completed its split on June 6.
Amazon is the kingpin of online-retail companies. A March report from eMarketer estimated the company would bring in a whopping 39.5% of all online-retail spending in the U.S. in 2022. For context, that's over 8 percentage points more in market share than Amazon's 14 closest competitors combined. In other words, Amazon's online-marketplace leadership isn't going to be challenged anytime soon.
Even though Amazon's online marketplace generates the bulk of the company's revenue, it may well be the least important operating segment from a profitability standpoint. What's far more important is how this leading segment has helped Amazon sign up more than 200 million Prime members worldwide. Assuming each member pays the annual fee of $139, Amazon is collecting close to $28 billion in high-margin revenue each year that it can funnel to its logistics network or other fast-growing initiatives.
The company is not only the leading online marketplace, but its Amazon Web Services (AWS) brought in an estimated 33% of global cloud service spending in the first quarter, according to a report by Canalys. We're still early in the cloud growth cycle, and the margins associated with cloud services can run circles around the margins associated with online-retail sales. Even though AWS contributes 15% to 16% of Amazon's net sales, it regularly accounts for well over half of the company's operating income.
While Amazon isn't exactly inexpensive based on its forecast earnings, it is decisively cheap, relative to Wall Street's forecast cash flow for the company. After Amazon spent the 2010s valued between 23 and 37 times year-end operating cash flow, investors can purchase shares of the online retailer for about 10 times forecast cash flow by 2025.
Stock-split stock No. 2 to buy hand over fist: Alphabet
The second stock-split stock that's simply never been cheaper for investors is Alphabet (GOOGL 10.15%) (GOOG 9.85%), the parent company of internet search-engine Google, streaming-platform YouTube, and self-driving car company Waymo. Alphabet announced its intent to conduct a forward 20-for-1 stock split all the way back in February. Following approval from its shareholders, the company enacted its split on July 18.
For more than two decades, internet search-engine Google has been the company's anchor. It's practically a monopoly, with Google controlling at least 91% of global internet-search share over the past two years. Since Google is the the go-to search platform, it allows parent-company Alphabet to command excellent pricing power when negotiating with merchants.
But similar to Amazon, it's not the foundational segment that Wall Street and investors are enamored with anymore. Rather, they're intrigued by the many projects into which Alphabet is funneling all of Google's operating cash flow.
As an example, YouTube has blossomed into one of the most-popular social sites on the planet. Approximately 2.48 billion people visit YouTube on a monthly basis, which provides the company with plenty of ad-pricing power. YouTube subscriptions are also adding to the revenue stream and keeping active viewers loyal to the brand.
Google Cloud represents another high-growth segment that can be a long-term game changer for Alphabet. Canalys notes that Google Cloud gobbled up 8% of worldwide cloud service spending share in the first quarter. Although Google Cloud is losing money for Alphabet right now, the juicy margins associated with cloud services should help this segment become a consistent moneymaker in the coming years.
Over the past five years, Alphabet's shares have been valued at an average of more than 26 times forward-year earnings and over 19 times cash flow. Investors can pick up shares of Alphabet for less than 20 times Wall Street's forecast earnings for 2023, as well as just nine times forecast cash flow by mid-decade.
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The stock-split value trap to avoid like the plague: SNDL
However, not all stock-split stocks are sound investments. A perfect example of a stock-split stock that screams "value trap" is Canadian licensed marijuana stock SNDL (SNDL 3.59%).
SNDL, which was formerly known as Sundial Growers, enacted a reverse 1-for-10 split on July 26. With its shares trading between $0.30 and $0.83 for the past year, SNDL needed a reverse split in order to remain compliant with the minimum listing price on the Nasdaq stock exchange. While not all stocks conducting reverse splits are automatically companies to avoid, a company with a low share price typically has headwinds that put it there.
SNDL has been a particular favorite of meme stock traders and early cannabis investors because the company sports a hardy cash balance. Whereas funding has been challenging for a number of Canadian pot stocks, SNDL ended March with 511.3 million Canadian dollars ($397.9 million) in cash, restricted cash, and marketable securities.
On the other end of the spectrum, it had no debt and roughly $207 million (U.S.) in short-and-long-term lease obligations. It's a cash-rich company that momentum-chasing retail investors view as a value. Unfortunately, SNDL is nothing more than a value trap.
Beginning Oct. 1, 2020, SNDL's management team began issuing common stock to raise enough capital to become debt-free. The thing is, management never turned off the spigot. The company continued to dilute its shareholders throughout 2021, well after it had enough capital to pay off its debt.
On a pre-split basis, SNDL's share count rose from 509 million to an almost unfathomable 2.33 billion. Even after its reverse split, SNDL is going to have a difficult time generating meaningful earnings per share.
To make matters worse, SNDL's management raised capital without any truly defined purpose. Even though the company eventually made a few investments/acquisitions with its capital, management never clearly laid out its intentions with its incessant capital raising (i.e., diluting) activities.
The final straw is that the Canadian pot market has been a disaster. Regulators at the federal and provincial level (at least in Ontario) were slow to approve key licenses, while consumers have gravitated to value-based dried cannabis, as opposed to the higher-margin pot products licensed producers were counting on.
With the company rapidly burning through its cash and the U.S. appearing no closer to legalization under President Joe Biden than it was under former-President Donald Trump, SNDL has all the hallmarks of a stock-split value trap to avoid like the plague.
