If just two themes have defined the stock market in 2022, those themes would be stock splits and the bear market. Both have disproportionately affected the technology sector, with some of the largest tech companies in the U.S. opting for stock splits to reduce their high share prices, and the Nasdaq-100 tech index bearing the brunt of the broader market losses.
Palo Alto Networks (PANW +5.65%), Shopify (SHOP 4.37%), and Tesla (TSLA +2.71%) have all conducted stock splits this year, and each stock has touched its 52-week low within the last four months. Still, Wall Street analysts are quite bullish on all three, which begs the question: Should you follow Wall Street's lead and buy the dip on these stock split stocks?
NASDAQ: PANW
Key Data Points
Palo Alto Networks is a global leader in cybersecurity
Anthony Di Pizio (Palo Alto Networks): Palo Alto Networks' stock price hit a 52-week low of $140.52 in May, and while it has since bounced to $184.37, Wall Street investment bank Morgan Stanley is betting it could soar to $274.33. That represents an upside of 49% from where it trades today. If it gets there, that would also be a tidy gain of 95% from its 52-week low.
Why is Morgan Stanley so bullish? Well, Palo Alto recently reported an incredibly strong financial performance for its fiscal 2022, which ended July 31, even in the face of the economic slowdown. Its $5.5 billion in revenue was a 29% jump compared to its fiscal 2021. What's more, Palo Alto's remaining performance obligations soared by 40% to $8.2 billion, which suggests a revenue growth acceleration might be on the horizon.
This is all because cybersecurity isn't something companies want -- it's something they absolutely need. As businesses shift more of their operations online using cloud technology, their attack surface continues to grow, which means they need more intuitive forms of protection for their valuable digital assets. In fact, a recent survey of company leaders conducted by Morgan Stanley suggested that organizations would have almost no appetite for cutting back on cybersecurity spending, even during a recession.
Since Palo Alto is an industry leader in 11 cybersecurity categories, it's no surprise it has a huge roster of large customers. At the end of its fiscal 2022, 1,240 of its clients were spending $1 million or more annually on its products and services.
Management's guidance for fiscal 2023 points to more strength, with revenue expected to rise by as much as 25% to $6.9 billion. While that would be a marginal slowdown compared to fiscal 2022's growth rate, it's still significantly faster than the cybersecurity industry's growth rate of 14%.
NASDAQ: SHOP
Key Data Points
Shopify could lead the e-commerce recovery
Jamie Louko (Shopify): RBC Capital's Paul Treiber has put a 12-month price target of $60 on Shopify, implying 101% growth from Shopify's 52-week low of $29.84. This is undoubtedly optimistic, and it would constitute a stellar performance.
There are a few reasons Treiber might be so bullish. First, Shopify has plummeted, bringing what was once a highly valued stock down to a relatively low valuation. It trades at 8.3 times sales -- nearly its lowest valuation since going public in 2015. Right now, shares of Shopify are also trading closer to its all-time low valuation than to its average multiple over its life as a public company.
Shopify has experienced some short-term pain, but its long-term future still looks bright. Recession fears have spooked investors about the e-commerce space, and that makes sense: As consumer budgets tighten, shoppers will likely spend less on discretionary goods like those sold by many e-commerce merchants. That said, the long-term future of e-commerce adoption looks good. By 2024, e-commerce is expected to represent 22% of global retail sales. That's an increase from 18% in 2020.
Considering that Shopify is one of the leading platforms for small businesses to create and grow their online operations, the company is well-placed to capitalize on that expected expansion. Millions of businesses worldwide use its platform, and Shopify merchants accounted for more than 10% of all U.S. retail e-commerce sales in 2021. Shopify facilitated almost $47 billion in gross merchandise volume in the second quarter of 2022 alone.
Treiber also might like Shopify because of its high switching costs. The company offers nearly everything a merchant might need, from point-of-sale solutions to payment processing to capital loans. It has even started offering fulfillment services, where Shopify handles all the shipping and returns logistics for its merchants. Once a client begins to rely on all these tools, it can be tough to leave the ecosystem. Therefore, there's a good chance Shopify's merchant count will continue to grow, even during this precarious time for e-commerce businesses.
NASDAQ: TSLA
Key Data Points
Self-driving cars and autonomous robots
Trevor Jennewine (Tesla): Emmanuel Rosner of Deutsche Bank recently reiterated his buy rating on Tesla stock, and his split-adjusted price target of $375 per share implies an upside of 81% from its 52-week low and an upside of 29% from its current price.
Tesla is not a typical automaker. It's not even a typical electric car company. Instead, CEO Elon Musk sees it as an artificial intelligence and robotics company that makes electric cars. So, while the global electric car market is on pace to hit $802 billion by 2027, Tesla sits in front of a much larger opportunity. That said, electric cars are still a critical part of the equation, and Tesla has evolved from pioneer to market leader.
In the second quarter, Tesla accounted for 19% of battery electric car sales worldwide, easily topping the 11% market share held by runner-up BYD. That dominance naturally fueled strong top-line growth -- Tesla's trailing-12-month revenue skyrocketed by 60% over the past year to $67.2 billion -- but the company has also become a paragon of manufacturing efficiency. In fact, Tesla achieved an industry-leading operating margin of 16.2% over the past year, which sent its free cash flow soaring by 165% to $6.9 billion.
However, Musk believes that full self-driving software will eventually be the primary source of profitability for Tesla's car business, and the company arguably has an edge over other automakers when it comes to autonomous cars. Specifically, its fleet of autopilot-enabled cars has collected more than 35 million miles worth of autonomous driving data -- more than any other automaker -- and data is the cornerstone of artificial intelligence projects. With that in mind, Musk believes Tesla will "solve" full self-driving this year, and he plans for the company to start building robotaxis in 2024.
Assuming all goes according to plan, Tesla could launch an autonomous ride-hailing service shortly thereafter, and that would fundamentally change its business. UBS Group analysts believe the robotaxi market will be worth north of $2 trillion by 2030, and an Ark Invest white paper predicts autonomous ride-hailing platforms could earn $2 trillion in profits by 2030. Those estimates may be ambitious, but the big picture is clear: Tesla's market opportunity is set to expand dramatically, and its transition into software and services could turbocharge its margins.
Despite a valuation of 14.9 times sales that would traditionally be viewed as pricey, patient investors should seriously consider buying a few shares of this growth stock.
