A company that conducts a stock split typically does so to reduce its high share price so it's more attractive to smaller investors. Therefore, what do most stock-splitters have in common? They've created so much value over the long term that their share prices have soared into the hundreds or even thousands of dollars.
2022 has been a big year for stock splits. Some of the largest technology giants in the U.S. have chosen to execute them, and it prompts an interesting question: Could they perform just as well in the future, so another stock split is eventually needed? That would point to major gains for investors over the long run. A panel of Motley Fool contributors have identified Google parent Alphabet (GOOGL +0.66%)(GOOG +0.41%), Shopify (SHOP 1.37%), and Tesla (TSLA +3.93%) as the three best candidates.
Here's why investors will want to buy and hold them forever.
Leading from the front
Anthony Di Pizio (Alphabet): Historically, technology companies have struggled to maintain their relevance; the industry moves quickly and fresh competition is always around the corner (remember Myspace?). But the tech giants of today are relentless innovators; they rapidly adapt to change and spend aggressively on refining their edge to stay one step ahead of disruptors.
Alphabet's YouTube platform is a prime example of this, and it's a reason investors should want to own Alphabet stock for the extreme long term. The social media industry is being dominated by ByteDance's TikTok short-form video platform right now, which has become the fastest-growing mobile app in history. YouTube moved quickly to adapt to this threat by introducing its "Shorts" concept. Two years later, Shorts is attracting 1.5 billion monthly users, placing it neck and neck with its new rival.
NASDAQ: GOOGL
Key Data Points
But Alphabet has a history of similar successes. After all, its Google Search engine has 91% market share globally and that doesn't happen without a commitment to endless improvement. The brand is basically competing with itself in the search industry. Similarly, Google Cloud is currently outgrowing its peers -- one number doesn't make a trend, but in the quarter ended June 30 it grew its revenue by 35%, which was faster than its two main competitors, Amazon Web Services (33%) and Microsoft Azure (20%). Google Cloud is much smaller than both of them based on sales, but beating them for growth is key to catching up in the long run.
Financially speaking, Alphabet is a powerhouse and that's thanks to its operational diversity highlighted above. The company has generated $278 billion in revenue over the last four quarters, and it's highly profitable with $5.37 in earnings per share over the same period. It means Alphabet stock is about 24% cheaper than the broader tech market right now based on its price-to-earnings ratio of 20.3, compared to 26.7 for the Nasdaq-100 index. It might be a great time to pounce with the intention of holding for the long term, especially for smaller investors, because Alphabet's recent 20-for-1 stock split has made it far more affordable.
Don't forget about this e-commerce darling
Jamie Louko (Shopify): Shopify enacted a 10-for-1 stock split in late June, but the company didn't see the short-term pop in its share price the way most companies that recently split their stock have. While a stock split doesn't fundamentally change the business -- it only makes shares cheaper by turning one share into 10 -- investors have gotten excited about stock splits this year. Shopify seemed to be left out of that, but here's why this stock shouldn't be forgotten.
Part of the reason shares didn't see that boost after Shopify split its stock is that shares have been on the decline in recent months. Year to date, Shopify stock is down more than 77% as it has struggled with a looming recession and rising inflation. These challenging macroeconomic factors are impacting Shopify, as consumers are less willing to buy discretionary e-commerce items during times of uncertainty. The company enables millions of e-commerce businesses to sell online, so less activity for its merchants results in less revenue for Shopify.
That said, Shopify certainly has the potential to win over the long term. Its solutions have seen steady adoption. Even during this difficult environment, Shopify saw e-commerce and point-of-sale gross merchandise volume growth that outpaced the broader industry in the U.S. in the second quarter of 2022, signaling that it is taking market share.
Shopify also has one key advantage: its switching costs. Not only is Shopify a leading platform for e-commerce businesses, but it also provides hardware products to help in-store sales. Additionally, Shopify merchants have access to a payment processing system, short-term capital loans, and even a logistics network providing fast, reliable delivery for both Shopify's merchants and their customers. Therefore, once a merchant gets into the Shopify ecosystem and begins to add more products, it can be hard to shift to a different platform. This could allow it to hold onto its customer base during its downturn, while rivals might lose customers, and, thus, market share.
With shares getting beaten down, the company now trades at eight times sales. While that is more expensive than rivals like BigCommerce Holdings -- which currently trades at 4.6 times sales -- this is the cheapest valuation Shopify has seen in a while and is much more reasonable than past valuations. Therefore, now might be the time to add shares of this e-commerce leader to your portfolio for the long haul.
The highest operating margin in the auto industry
Trevor Jennewine (Tesla): Not long ago, Tesla was so insignificant that other automakers failed to see it as a threat. In fact, a former Daimler chairman once said Tesla was a joke compared to the great car companies of Germany. That was in 2015. It's funny how quickly things can change.
In the first half of 2022, Tesla led the industry with 19% market share in battery electric vehicle sales, 8 percentage points more than Chinese automaker BYD, the next closest competitor. Better yet, in spite of supply chain issues and lockdowns in China, Tesla posted solid financial metrics over the past year. Revenue surged 60% to $67.2 billion, free cash flow soared 165% to $6.9 billion, and the company achieved an industry-leading operating margin of 16.2%.
NASDAQ: TSLA
Key Data Points
That's so important that it needs to be repeated. Tesla -- a company that was once considered a joke -- now has the highest operating margin in the auto industry. That success stems from its dogged focus on manufacturing efficiency, a quality that CEO Elon Musk says will be Tesla's greatest competitive advantage in the long run. But investors have other reasons to be bullish.
Tesla is constantly collecting data from its autopilot-enabled fleet. To that end, it has more autonomous driving data than any other automaker, and that gives it an edge in the race to build a self-driving car. Tesla has a robotaxi scheduled for volume production in 2024, and the company plans to launch an autonomous ride-hailing service at some point in the future.
That could be a game changer. Musk believes full self-driving software will ultimately be the most important source of profitability for Tesla, and plenty of analysts have backed that sentiment with lofty forecasts. For instance, UBS Evidence Lab says the robotaxi market will be worth at least $2 trillion by 2030, and Ark Invest says autonomous ride-hailing services could earn $2 trillion in profits per year by 2030.
In a sense, Tesla is currently a hardware-centric company that could become a software-centric company in the future, and software-centric businesses typically come with much higher margins. That means Tesla could become even more profitable in the years ahead. That's why this stock-split stock is worth buying.
