In the wake of last year's historic downturn, 2023 appears to be coming up roses, at least so far. A combination of high inflation, rising interest rates, and rampant pessimism foiled efforts by investors to remain upbeat last year. As a result, each of the major stock market indexes plunged into bear market territory, resulting in Wall Street's worst performance in more than a decade.
The macroeconomic conditions and the bear market aside, one of the biggest developments in recent years has been a resurgence in popularity of stock splits. This is the process by which a company reduces the price of its stock while simultaneously increasing its share count by a commensurate amount, thereby making the stock more affordable to a greater number of retail investors. Stock splits tend to attract attention because they are typically employed by wildly successful companies with soaring stock prices.
It should be no surprise, then, that some of the world's most successful investors have been stocking up (if you'll pardon the pun) on companies that recently split their shares. Let's look at two of their most notable acquisitions.
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The search is over...
Alphabet (GOOGL 0.93%) (GOOG 0.92%), Google's parent company, enacted a 20-for-1 stock split payable July 15, 2022. In the decade leading up to this event, Alphabet shares had surged nearly 700%. The stock was trading for more than $2,200 per share, making a compelling case for a stock split.
Among the biggest acquirers of Alphabet stock in the first quarter was hedge fund manager and activist investor Bill Ackman, founder of Pershing Square Capital Management. Ackman has numerous notable investing wins to his credit, such as taking a $60 million stake in distressed mall operator General Growth Properties, a company racing toward bankruptcy, and parlaying that into a cool $3.5 billion.
Ackman made a sizable bet on Alphabet in the first quarter, buying roughly 8 million Class C shares and more than 2 million Class A shares with a combined worth of roughly $1.27 billion.
So what prompted this considerable investment? There's little doubt that Google search, which holds a dominant 93% of the market, was a contributing factor. This also forms the foundation of Google's industry-leading adtech business, which controls about 30% of global digital ad spending, according to industry trade publication Digiday.
However, the biggest factor was likely the bargain-basement price. Investors will recall Alphabet's precipitous decline soon after Microsoft divulged its $13 billion stake in ChatGPT creator OpenAI and plans to integrate the generative artificial intelligence (AI) technology into its Bing search engine. In the weeks that followed, Alphabet stock plunged more than 17%, erasing $238 billion from its market cap.
Ackman, like his mentor, Warren Buffett, loves a bargain and snapped up shares of this stock-split stock when its price-to-earnings ratio fell below 17. That's a screaming bargain for a stock with a long history of industry leadership and solid growth and decades' worth of AI expertise.
Alphabet isn't quite as cheap as it was just months ago, but at less than 23 times forward earnings, it remains a screaming bargain nonetheless.
Shop 'til you drop
E-commerce leader Amazon (AMZN -0.09%) enacted a 20-for-1 stock split payable June 3, 2022 -- and it isn't hard to understand why. In the 10 years heading into its split, Amazon shares rocketed more than 1,000%, and the stock was trading for nearly $2,800 per share.
One billionaire buyer of Amazon stock in the first quarter was hedge fund manager David Tepper, founder of Appaloosa Management. Among Tepper's credits is a huge bet he made on bank stocks in the wake of the Great Recession in 2009, which netted the investing maestro a cool $7 billion.
Tepper increased his already-hefty stake in Amazon during the first quarter, buying more than 500,000 additional shares, increasing his holdings to about 2 million. Amazon now comprises more than 11% of the portfolio -- making it Appaloosa's second-largest position (behind Alphabet) -- worth more than $260 million.
The billionaire hedge fund manager has been mum about his recent purchase but previously called Amazon stock a "bellwether," one that he viewed as "attractive" when the stock was selling for less than 4 times sales. A quick look at the current chart reveals that Amazon currently sports a price-to-sales ratio of 2.5, so his reasoning seems fairly apparent.
There's more. Tepper is well aware of Amazon's industry-leading position in e-commerce, noting that the company has forever changed consumer buying behavior.
- While estimates vary widely, one of the more conservative suggests Amazon receives roughly $0.38 of every dollar spent on digital retail, according to Statista.
- Furthermore, Amazon Web Services (AWS), the company's cloud computing business, accounts for nearly one-third of worldwide cloud infrastructure spending, nearly as much as Google Cloud and Microsoft Azure combined.
- Finally, Amazon has become the third-largest digital advertiser in the U.S., controlling more than 13% of the market in 2022, according to Insider Intelligence.
With all that working in Amazon's favor, it's little wonder Tepper has been loading up on this stock-split stock.
I'm buying too
Given the companies' multiple industry-leading positions, market dominance, and discounted valuations, it's hard to find fault with these billionaires for buying shares in these top-tier -- and dirt-cheap -- stock-split stocks. In fact, I also added to my existing positions in both Alphabet and Amazon in recent months. Guess I'm in pretty good company.
