Even after accounting for last week's rally, it's been a historically bad year for Wall Street. Not only did the benchmark S&P 500 produce its worst first-half return since 1970, but according to Charlie Bilello, the founder and CEO of Compound Capital Advisors, the S&P 500 has already endured its greatest number of 1% (or greater) down days since 2008.
Despite this demoralizing short-term move in the major U.S. indexes, investors have still found a source of inspiration in this market. I'm talking about stock splits.
A stock split is an event that allows a publicly traded company to alter its outstanding share count and share price without having any impact on its daily operations or its market cap. Well over 200 stock splits have been announced and enacted since the year began.
Image source: Getty Images.
Stock splits come in two varieties: forward splits and reverse splits. Reverse splits are designed to increase a company's share price while lowering its outstanding share count by the same magnitude. While not always a sign of weakness, reverse splits are typically enacted to avoid delisting from a major U.S. exchange.
Meanwhile, forward stock splits lower a publicly traded company's share price while increasing its outstanding share count by the same factor. Most investors flock to forward stock-split stocks as it almost always signals a company that's firing on all cylinders and out-innovating its peers.
While there have been a number of high-profile forward stock splits in 2022, two stocks stand head-and-shoulders above their peers as incredible values. The following two stock-split stocks have the competitive advantages and innovative capacity needed to double your money by 2026.
Amazon
The first stock-split stock that has the ability to double your money over the next four years is e-commerce stock Amazon (AMZN +2.02%). Amazon completed a 20-for-1 stock split in early June.
Like most growth stocks, Amazon and its peers have been taken to the woodshed during the current bear market. Interest rates are rising rapidly, which is cutting off access to the cheap capital fast-paced companies had been using to hire, expand, and innovate.
More specific to Amazon, it's encountering weakness from its online marketplace as high inflation bites the pocketbooks of low-earning consumers. To add, companies trading at premium valuations are often hit hardest during double-digit percentage declines in the major U.S. stock indexes.
NASDAQ: AMZN
Key Data Points
Although it's been a rough year, none of these headwinds is particularly worrisome. The most important thing for investors to understand is that even though Amazon generates most of its revenue from its dominant e-commerce platform, this segment generates only a small percentage of its operating cash flow and income. The company's marketplace has acted as a fantastic lure that's opened up bountiful high-margin sales channels.
As an example, Amazon's thoroughly dominant online marketplace was the catalyst that helped it sign up more than 200 million people worldwide to a Prime membership, as of April 2021. This figure has almost assuredly risen given Amazon's exclusive rights to Thursday Night Football. This high-margin, recurring-revenue-driven segment is nearly pacing $36 billion in annual run-rate revenue.
Additionally, Amazon Web Services (AWS) is the world's No. 1 cloud infrastructure service provider, with the segment accounting for close to a third of all cloud spending during the second quarter. AWS is pacing more than $82 billion in yearly run-rate sales, and its superior margins have made it responsible for most of Amazon's operating income.
Even advertising services are playing a key role for Amazon. Despite challenging economic conditions, Amazon's advertising services grew by 30% on a constant-currency basis from the prior-year period in the third quarter.
Collectively, subscription services, advertising services, and AWS, are growing by a sustained double-digit percentage on a constant-currency basis, and are responsible for most of Amazon's current and future cash flow growth.
Between 2010 and 2019, Amazon ended each year valued at 23 to 37 times cash flow. Based on Wall Street's cash flow forecast, you can buy shares today for just 6.6 times the company's expected cash flow in 2026. That's bargain-basement cheap and all the more reason Amazon can double in four years.
Image source: Getty Images.
Alphabet
The second stock-split stock that has an excellent chance to double your money by 2026 is Alphabet (GOOGL 0.39%)(GOOG 0.20%), the parent of internet search engine Google and streaming platform YouTube. Alphabet enacted a 20-for-1 stock split following shareholder approval in mid-July.
Like its FAANG stock brethren, Alphabet has fallen off a proverbial cliff in recent months. With fear mounting that a U.S. recession could be around the corner, advertisers have pared back their spending. That's not good news for a company like Alphabet that relies so heavily on ad revenue.
Including adverse currency movements during the third quarter (i.e., a stronger U.S. dollar), Alphabet's year-over-year ad revenue from YouTube declined. The other point of concern was the wider loss by Google Cloud despite 38% year-over-year sales growth.
While these headwinds shouldn't be swept under the rug or ignored, it's important to recognize that they're short-term in nature. For instance, ad-driven businesses benefit from a simple numbers game. Even though recessions will always be an inevitable part of the economic cycle, history shows that recessions are much shorter events than periods of economic expansion. This is a fancy way of saying that Alphabet's ad operations spend a disproportionate amount of time benefiting from U.S. and global economic expansion than it does under the grey skies of a recession.
NASDAQ: GOOGL
Key Data Points
To build on this point, Google enjoys phenomenal success as the most-dominant internet search engine in the world. For more than two years, Google has accounted for between 91% and 93% of global search each and every month. Advertisers are well aware of this, which is why they're willing to pay a premium to get their message in front of users. This borderline monopoly for Google isn't going away anytime soon, and it's providing Alphabet with plenty of cash flow to reinvest in other areas.
One of Alphabet's ancillary growth channels is the aforementioned YouTube, which has become the second most-visited social site on the planet. Alphabet has been tinkering with YouTube Shorts as a means to monetize viewers without having to rely on longer videos to do so.
There's also Google Cloud, which as noted is losing money at the moment. Whereas AWS holds a 31% share of global cloud spending, Google Cloud is the world's No. 3 infrastructure service provider with an 8% share, according to a report by Canalys. With sustained annual sales growth in Cloud of nearly 40%, the expectation would be for operating cash flow in this segment to pick up big-time by mid-decade.
And don't overlook Alphabet's balance sheet, either. As of Sept. 30, 2022, the company was sitting on $116.3 billion in cash, cash equivalents, and marketable securities, compared to $14.7 billion in debt. A cash-rich balance sheet gives Alphabet the financial flexibility to invest in high-growth initiatives and make acquisitions.
Over the past five years, Alphabet has averaged a multiple of 18.9 times its cash flow. But if Wall Street's 2026 cash flow estimate for Alphabet proves accurate, you can buy shares right now for a multiple of 6.6 times cash flow (yes, the exact same multiple as Amazon by 2026). That would be historically cheap for such a fast-growing company like Alphabet.
