Stock splits have attracted plenty of attention from investors in 2022, primarily because of the high-profile companies that have chosen to implement them. So far, Amazon (AMZN +3.47%), Shopify, and Google parent Alphabet (GOOGL +1.63%)(GOOG +1.44%) have all reduced their stock price using a stock split, with Tesla set to join them on Wednesday, Aug. 24.
When a company generates a substantial amount of value over the long term, its price per share can soar to the point where it costs hundreds (even thousands) of dollars to purchase a single share. Such high share prices can place the company out of reach or off the radar of some smaller investors, resulting in large funds and institutions holding most of the stock.
A stock split increases the number of shares in circulation for a given company and, in turn, proportionally reduces the price per share an equal amount. It's important to remember, though, that stock splits are purely cosmetic; they don't add or subtract any intrinsic value from the company itself.
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With that said, if there were two stock-split stocks to buy based on the merits of their businesses, these would be them -- and both are trading at attractive discounts to their all-time highs right now.
1. Amazon
E-commerce giant Amazon initiated a 20-for-1 stock split on June 6, which reduced its price per share from roughly $2,447 to $122. The stock price remains 24% below its (adjusted) all-time high price of $188 despite recently reporting strong financial results for the second quarter of 2022. That price drop might offer an opportunity for investors.
The company's operational diversity is what makes it one of the best stocks to own -- stock split or not -- and it was on full display during the quarter. While Amazon's e-commerce business grappled with high inflation and a consumer with weakened spending power, its cloud services segment picked up the slack. It's driven by Amazon Web Services (AWS), which leads the cloud industry in both revenue and the number of solutions it provides to customers.
NASDAQ: AMZN
Key Data Points
AWS made an operating profit of $5.7 billion in the second quarter and accounted for just 16% of Amazon's total revenue. The rest of Amazon's businesses made a combined loss of $8.3 billion, led by a decline in the value of Amazon's stake in electric vehicle maker Rivian Automotive.
But the company has new opportunities around the corner in areas like advertising, where it has generated $33.9 billion in revenue over the last four quarters. The segment could receive a boost shortly thanks to Amazon owning broadcasting rights to the NFL's Thursday Night Football, and the launch of the highly anticipated Lord of the Rings: Rings of Power television series, which is exclusive to the Prime streaming platform. Both of these assets will air starting in September.
Having multiple revenue streams is a great hedge against a deteriorating economic climate, and that alone makes Amazon stock a great buy right now.
2. Alphabet (Google)
The second stock-split stock to buy on the dip is Alphabet, which is the parent company of Google. Like Amazon, Alphabet also operates in multiple business segments including hardware, cloud services, and its world-leading video platform YouTube.
Google Search remains the key revenue driver behind Alphabet, accounting for 58% of its $69.8 billion in second-quarter revenue. It's not surprising since it currently holds a 91% global market share in the search engine business despite trillion-dollar giants like Microsoft mounting a challenge with its Bing alternative.
Google Cloud was the fastest-growing piece of Alphabet's overall business, although it's still quite small with just $6.2 billion in revenue during the second quarter. It was an increase of 45% year over year, which was much faster than Alphabet's total growth rate of 12%. Google Cloud is currently ranked third behind Amazon Web Services and Microsoft Azure in the race to dominate the cloud industry with a market share of 8%, so it has a long runway for growth if it can climb the ladder.
But one of Alphabet's largest opportunities going forward could lie with its YouTube platform. Its growth could gain new legs thanks to its Shorts format that is designed to compete with ByteDance's TikTok -- the fastest-growing mobile application in history. Despite launching just two years ago, Shorts is already attracting 1.5 billion monthly active users and it could be incredibly lucrative for Alphabet as advertisers chase younger audiences who prefer this format.
Alphabet's 20-for-1 stock split on July 18 reduced its price per share from $2,235 to $112, and the stock price remains 20% below its all-time high. On a price-to-earnings basis, Alphabet stock is really attractive with a multiple of 22.3, making it 18% cheaper than the Nasdaq-100 technology index's multiple of 27.3. That's an opportunity for investors who buy in now, especially for those with the long term in mind.
