Although the three major U.S. stock indexes tend to rise in value over time, 2022 has served as a clear reminder that this increase doesn't occur in a straight line. On the heels of historically high inflation, back-to-back quarterly declines in U.S. gross domestic product (GDP), and Russia's invasion of Ukraine further compromising the global energy supply chain, the benchmark S&P 500 and growth-centric Nasdaq Composite plunged into a bear market.
But the interesting thing about bear markets is there's always opportunity -- and investors found it in 2022 with stock-split stocks.
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Stock-split euphoria has taken hold on Wall Street
Think of a stock split as a lever a publicly traded company can pull to alter its share price and outstanding share count without having any effect on its market cap or operations.
Investors tend to be most-excited about forward stock splits, which is where a company reduces its share price via a split while its outstanding share count increases by the same factor (ergo, no change in market cap). For everyday investors without access to fractional-share purchases through their online broker, a forward stock split makes a company's stock more nominally affordable.
Additionally, a company wouldn't be conducting a forward stock split if its share price hadn't significantly increased. A publicly traded company's share price doesn't usually increase by a lot unless said company is firing on all cylinders and out-innovating its competition. Thus, forward stock splits have become something of a beacon to help investors recognize when companies are outpacing their peers.
Including reverse stock splits, which allows a company to increase its share price and subsequently reduce its outstanding share count by the same factor, more than 200 splits have been announced and/or enacted since the year began.
The Tesla and Shopify stock splits were highly anticipated
Most investors have been laser-focused on high-profile stock splits of widely owned companies, such as electric-vehicle (EV) manufacturer Tesla (TSLA 12.06%) and cloud-based e-commerce platform Shopify (SHOP -2.37%).
Shopify announced its plan to split its shares 10-for-1 in April, and ultimately conducted its stock split in late June. The company, whose shares were changing hands at more than $1,760 less than a year ago, could be purchased this past week for about $30. That's a much friendlier share price for retail investors.
Meanwhile, EV maker Tesla announced its intention to conduct a stock split in June. With shareholders offering their approval, Tesla enacted a 3-for-1 split on August 25. It's the second time Tesla has split its shares in as many years.
Both companies are investor favorites because of the opportunities that lie ahead. For instance, Shopify foresees a $153 billion addressable market solely from helping small businesses grow their online retail platforms. This figure doesn't even address the inroads it's made with larger businesses or touch on its innovation, such as introducing buy now, pay later service Shop Pay in 2021.
As for Tesla, it's sitting on a veritable gold mine as the North American leader in EV production. It's no secret that most developed countries are pushing green-energy initiatives, which include emphasizing the shift to EVs and other clean-energy transportation. This is a multidecade growth opportunity for Tesla and the auto industry.
And yet, despite their popularity, both of these stock-split stocks are highly vulnerable at the moment. Being dependent on retail sales in an environment with rapidly rising inflation and declining GDP is a poor recipe for Shopify. Even after losing more than 80% of its value, Shopify remains pricey relative to a number of key fundamental metrics.
As for Tesla, it trades at a nosebleed multiple to earnings despite the fact that its competitive edges, such as battery range, are already being chipped away by new and legacy automakers. Further, CEO Elon Musk stands out for the legal, financial, and operating risk he brings to the table. Even though he's a visionary, he's grown into a significant liability for Tesla shareholders.
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This off-the-radar stock, with an upcoming split, is a much smarter buy
While it's not a surprise that these two widely held companies have attracted plenty of attention prior to and following their respective stock splits, there's an off-the-radar stock with an upcoming split that makes for a much smarter buy right now than Tesla or Shopify. I'm talking about cybersecurity stock Palo Alto Networks (PANW 0.11%), whose board of directors approved a 3-for-1 stock split, which is set to take effect prior to the market open on September 14.
One reason Palo Alto Networks makes for such a no-brainer buy is the nature of the cybersecurity industry. Whereas online retail sales and EV sales are cyclical, cybersecurity has evolved into a basic necessity solution. No matter how poorly the U.S. economy or stock market perform, hackers and robots don't take time off from trying to steal critical data. This leads to a steady, if not persistently growing, level of demand for cybersecurity solutions.
What's been particularly intriguing to watch with Palo Alto Networks is its four-year and counting operating transformation. Specifically, the company has focused its attention on cloud-based software-as-a-service solutions. Cybersecurity solutions reliant on artificial intelligence (AI) and machine-learning are usually more efficient at recognizing and responding to potential threats, compared to on-premises security solutions.
Over the past five fiscal years (the company's fiscal year ends on July 31), the percentage of total sales derived from subscriptions and support has grown from 59.7% to 75.2%. Not only is this a considerably higher-margin operating segment, compared to physical firewall products, but it'll ultimately help reduce the revenue lumpiness associated with physical product replacement cycles.
To add, Palo Alto ended its most-recent fiscal year with $8.2 billion in remaining performance obligations (i.e., future performance obligations based on existing contracts). This represents about 119% of the $6.85 billion to $6.9 billion in total sales the company expects to report in fiscal 2023. In other words, Palo Alto is well-protected against any short-term U.S. and global economic weakness.
As I recently pointed out, Palo Alto Networks has also done a phenomenal job in the inorganic growth department. This is a company known for making bolt-on acquisitions that are designed to enhance cross-selling opportunities and expand its product/service ecosystem.
If you're after popularity, Tesla and Shopify have Palo Alto Networks beat, hands down. But what's popular isn't always what's profitable. If you want to generate a healthy return on your investment, stock-split stock Palo Alto Networks makes for the smarter buy.
