If there's one certainty about investors as a whole, it's that they'll find the good in even the direst situations. With the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite tumbling into a bear market in 2022, investors turned to companies enacting stock splits for good news.
A stock split allows a publicly traded company to alter its share price and outstanding share count without having any impact on its market cap or operations. Forward stock splits lower a company's share price while increasing its share count by the same magnitude, while a reverse stock split is designed to increase a company's share price and reduce its outstanding share count by the same factor.
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In general, forward stock splits are what tend to attract investors. Companies enacting forward splits are usually outperforming and out-innovating their competition. Reducing a public company's share price via a stock split makes it more nominally affordable for everyday investors who don't have access to fractional-share purchases with their online broker.
But it's not just retail investors that have been fascinated with stock-split stocks. According to the newest round of Form 13F filings with the Securities and Exchange Commission (SEC), billionaire money managers have been buying up shares of companies that have enacted stock splits.
What follows are three stock-split stocks billionaires couldn't stop buying during the first quarter.
Alphabet
The one stock-split stock that stands head and shoulders above all others when it comes to billionaire buying interest is Alphabet (GOOGL -1.97%) (GOOG -2.09%), the parent company of internet search engine Google and streaming platform YouTube. Alphabet completed a 20-for-1 forward stock split in mid-July of last year.
During the first quarter, seven billionaires added Alphabet Class A (GOOGL) shares to their respective funds, including:
- Dan Loeb of Third Point
- Philippe Laffont of Coatue Management
- Chase Coleman of Tiger Global Management
- Bill Ackman of Pershing Square Capital Management
- Steven Cohen of Point72 Asset Management
- Ray Dalio of Bridgewater Associates
- Israel Englander of Millennium Management
In this exact order, these billionaires bought roughly 4.75 million shares, 4.64 million shares, 4.64 million shares, 2.19 million shares, 2.15 million shares, 1.56 million shares, and 1.56 million shares of Google Class A stock in the March-ended quarter.
The operating segment that makes Alphabet tick is Google. Based on monthly data provided by GlobalStats, you have to go back to the first quarter of 2015 to find the last time Google didn't account for at least a 90% share of global internet search. Even with ad spending somewhat depressed in the short term as domestic fears of a recession build, Google shouldn't have any trouble remaining a cash cow with a virtually insurmountable market share lead.
However, billionaires are probably buying shares of Alphabet for its ancillary business segments as much as they are for its tried-and-true internet search division. For instance, YouTube has become the second most-visited social site on the planet. More importantly, short-form videos known as Shorts are really resonating with users. Daily Shorts views have jumped to north of 50 billion from roughly 30 billion in less than a year.
Google Cloud represents another intriguing opportunity for Alphabet. The first quarter saw Alphabet's cloud infrastructure service segment generate a profit while sustaining a double-digit growth rate. Keep in mind that enterprise cloud spending is still in its early stages, which should give Google Cloud plenty of opportunity to become a serious cash flow driver in the years to come.
DexCom
A second stock-split stock that billionaires can't stop buying is medical device company DexCom (DXCM 0.66%), which undertook a 4-for-1 forward split in mid-June 2022. DexCom designs and manufactures continuous glucose monitoring (CGM) devices for patients with diabetes.
According to an abundance of 13F filings, five billionaire fund managers were eager buyers of DexCom shares, including:
- Ken Griffin of Citadel Advisors
- Steven Cohen of Point72 Asset Management
- John Overdeck and David Siegel of Two Sigma Investments
- Jim Simons of Renaissance Technologies
In the same order as listed above, these billionaires purchased approximately 1.81 million shares, 1.36 million shares, 349,100 shares, and 212,900 shares of DexCom stock during the first quarter.
The "why?" behind these buys is simple: untapped opportunity. The number of people in the U.S. and globally with diabetes continues to grow. In the U.S., the number of diabetics regularly using insulin to achieve glycemic balance who qualify for a CGM is more than triple the actual number of patients currently using a CGM. There's a sustainable opportunity for DexCom to grow its sales, profits, and pricing power over time as awareness of CGMs grows domestically.
But this is far from a domestic story. In 2000, 151 million people worldwide had diabetes. As of 2021, this figure had more than tripled to 537 million. By 2045, IDF Diabetes Atlas estimates 783 million people will be diabetic globally. Expanding its products into new regions and improving reimbursement access internationally should allow DexCom to sustain an annual sales growth rate of near 20% for the foreseeable future.
Another reason billionaires are onboard with DexCom is the company's innovation. DexCom has developed numerous generations of CGMs, and it regularly leans on the competitive advantages of its products, such as real-time readings and wireless connectivity, to differentiate itself from its peers.
Image source: Getty Images.
Palo Alto Networks
The third stock-split that billionaires can't stop buying is cybersecurity company Palo Alto Networks (PANW -1.61%). Palo Alto completed a 3-for-1 stock split last September.
Based on Form 13F filings, three successful billionaire money managers took the plunge with Palo Alto, including:
- Steven Cohen of Point72 Asset Management
- Ken Griffin of Citadel Advisors
- Chase Coleman of Tiger Global Management
As listed above, these billionaire investors purchased in the neighborhood of 571,400 shares, 355,100 shares, and 257,700 shares of Palo Alto Networks' stock during the first quarter.
The great thing about cybersecurity stocks is they've evolved into basic necessity solution providers. Businesses were steadily moving their data online and into the cloud prior to the COVID-19 pandemic. But over the past three years, this shift has accelerated.
No matter what's happening with the stock market or U.S. economy, businesses of all sizes with an online or cloud presence need to protect their sensitive information. That's good news for Palo Alto and its peers.
What's really powered Palo Alto's growth over the past couple of years is its defined shift toward cloud-based software-as-a-service (SaaS) solutions. Although it's not abandoned physical firewall products, the percentage of net sales derived from SaaS subscriptions has grown from 61.7% in fiscal 2018 (the company's fiscal year ends July 31) to 78.3% through the first nine months of fiscal 2023. A subscription-driven operating model should enhance its gross revenue retention and provide a lift to the company's long-term operating margin.
Something else that's likely raising the eyebrows of billionaire fund managers is Palo Alto's ability to land big customers and coerce add-on sales. The company now has 25 accounts generating at least $10 million in total bookings, which is more than double from where things stood at this time last year.
Furthermore, the percentage of Prisma Cloud subscribers that purchased four or more modules grew 90% year over year in the fiscal third quarter. Landing the big fish and netting add-on sales is an easy way to continually trounce Wall Street's revenue and profit growth forecasts.
