There are a lot of ways to make money on Wall Street. Over the past couple of years, gravitating to stocks enacting splits has been one of the more profitable strategies.
A stock split is an event that allows a publicly traded company to change its share price and outstanding share count (by the same magnitude) without having any impact on its market cap or operating performance. It's a cosmetic move that can make shares more nominally affordable for everyday investors, as with a forward stock split, or can increase a company's share price to avoid delisting from a major exchange, as with a reverse stock split.
Image source: Getty Images.
Since July 2021, investors have flocked to eight prominent, profitable, and time-tested businesses that have conducted forward stock splits. Listed in the chronological order of when they conducted their respective splits, these companies are:
- Nvidia (NVDA 6.18%): 4-for-1 split in July 2021
- Amazon (AMZN 3.43%): 20-for-1 split in June 2022
- DexCom (DXCM -9.90%): 4-for-1 split in June 2022
- Shopify (SHOP 1.11%): 10-for-1 split in June 2022
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split in July 2022
- Tesla (TSLA -1.11%): 3-for-1 split in August 2022
- Palo Alto Networks (PANW 0.91%): 3-for-1 split in September 2022
- Monster Beverage (MNST 0.41%): 2-for-1 split in March 2023
The success of these stock-split stocks isn't lost on Wall Street's most-successful money managers, either. Based on the latest round of 13F filings with the Securities and Exchange Commission, billionaire investors were actively moving their money into or out of some very widely owned stock-split stocks.
Stock-split stock No. 1 billionaires were busy selling in the second quarter: Amazon
The stock-split stock that saw what can be described as the most-aggressive selling from billionaire fund managers during the second quarter is e-commerce company Amazon. Eight prominent billionaires were big-time sellers, including:
- Jim Simons at Renaissance Technologies (8,999,016 shares sold)
- Chase Coleman at Tiger Global Management (5,989,891 shares)
- Ole Andreas Halvorsen at Viking Global Investors (3,226,907 shares)
- Stephen Mandel at Lone Pine Capital (1,709,767 shares)
- John Overdeck and David Siegel at Two Sigma Investments (1,443,520 shares)
- Israel Englander at Millennium Management (1,159,561 shares)
- Steven Cohen at Point72 Asset Management (994,294 shares)
This selling pressure probably has to do with Amazon being cyclical, as well as the company's lofty valuation, based on traditional fundamental metrics.
Amazon generates a majority of its sales from its world-leading online marketplace. With economic uncertainty taking center stage throughout much of 2023, the expectation would be for weaker consumer spending in the months and quarters to come.
Meanwhile, Amazon's stock is commanding a price-to-earnings (P/E) ratio of 61, based on Wall Street's earnings consensus for this year. That's well over double the P/E of the benchmark S&P 500.
However, valuing Amazon based on traditional metrics has never been a smart move. Since the company reinvests so much of its cash flow back into the business, operating cash flow is a far better valuation measurement for Amazon. After trading at 23 to 37 times year-end cash flow between 2010 and 2019, Amazon can be purchased for 15 times forecast cash flow for this year and about 9 times estimated cash flow in 2026. In other words, Amazon is, arguably, cheaper than it's ever been as a publicly traded company.
Stock-split stock No. 2 billionaires were busy selling in the second quarter: Alphabet
A second stock-split stock billionaire money managers ran away from during the June-ended quarter is Alphabet, the parent company of internet search engine Google and the second most-popular social media site globally, YouTube. The three highly successful billionaires that meaningfully reduced their exposure to Alphabet's Class A shares (GOOGL) include:
- Chase Coleman of Tiger Global Management (4,551,949 shares sold)
- Dan Loeb of Third Point (3,325,000 shares)
- Steven Cohen of Point72 Asset Management (3,299,177 shares)
The likeliest reason for this selling is the expectation of economic weakness. Even though the U.S. economy has proved more resilient than anticipated, multiple datapoints and predictive indicators suggest weakness to come. Since Alphabet is reliant on advertising for a significant percentage of its revenue, and advertisers tend to pare back their spending at the first signs of trouble, billionaires may have been playing it safe by paring down their exposure.
Ultimately, I believe this is a move Coleman, Loeb, and Cohen will regret. Though ad spending is cyclical, Google is a practical monopoly in the internet search space. Based on data from GlobalStats, Google held a 92.1% share of the global internet search market in July 2023, and hasn't accounted for less than 90% of worldwide search share since March 2015.
Further, Alphabet's fast-growing ancillary segments are really coming into their own. YouTube Shorts (short-form videos usually lasting less than a minute) have grown from 6.5 billion daily views to north of 50 billion over the past two years. Meanwhile, Google Cloud has become the world's No. 3 cloud infrastructure service provider, and has delivered back-to-back quarters of operating income. Thanks to its fast-growing ancillary divisions, Alphabet looks to be on the verge of a big uptick in operating cash flow.
Stock-split stock No. 3 billionaires were busy selling in the second quarter: Tesla
The third stock-split stock that saw significant cash outflows from billionaires during the June-ended quarter is electric-vehicle (EV) manufacturer Tesla. The three top-notch billionaires that were busy selling Tesla shares include:
- Israel Englander at Millennium Management (2,457,514 shares sold)
- Jim Simons at Renaissance Technologies (1,933,244 shares)
- Jeff Yass at Susquehanna International (759,457 shares)
Unlike Amazon and Alphabet, there are a couple of very clear catalysts that likely precipitated this selling. For starters, Tesla has reduced the sales price of its EV lineup on at least a half-dozen occasions this year. During Tesla's first-quarter conference call, CEO Elon Musk addressed the company's pricing strategy and noted that it had everything to do with EV demand. If Musk's company is reducing prices by a double-digit percentage, it reflects weaker demand, growing competition, and weaker automotive gross margins to come.
Billionaire investors may also be growing tired of the theatrics that come with having Elon Musk as CEO. While there's little denying that he's an innovator, Musk has a habit of attracting negative attention from regulators. He's made numerous promises that haven't been kept, as well. For instance, his claim that fully autonomous Tesla vehicles are "one year away" has been made for the past decade.
Lastly, Tesla's valuation could be a prime reason for billionaires to sell. Despite the company's other revenue channels (e.g., supercharger network, energy storage, and services), it's overwhelmingly reliant on selling and leasing EVs to generate a profit. Most auto stocks trade at high-single-digit P/E ratios. Comparatively, Tesla is commanding a P/E of 66, based on Wall Street's consensus for 2023, which doesn't look sustainable.
Image source: Getty Images.
The stock-split stock billionaires absolutely piled into during the second quarter: Nvidia
On the other side of the aisle is the one stock-split stock billionaire money managers absolutely piled into during the June-ended quarter: Nvidia. The manufacturer of graphics processing units (GPUs) had 11 (yes, 11!) prominent billionaires buy shares, including:
- Jeff Yass of Susquehanna International (5,401,204 shares purchased)
- Jim Simons of Renaissance Technologies (1,852,712 shares)
- Israel Englander of Millennium Management (1,023,518 shares)
- David Tepper of Appaloosa Management (870,000 shares)
- Steven Cohen of Point72 Asset Management (662,385 shares)
- Stephen Mandel of Lone Pine Capital (641,649 shares)
- John Overdeck and David Siegel of Two Sigma Investment (629,072 shares)
- Chase Coleman of Tiger Global Management (584,700 shares)
- Dan Loeb of Third Point (500,000 shares)
- Ole Andreas Halvorsen of Viking Global Investors (312,400 shares)
The catalyst behind this aggressive collection of billionaire buys is undeniably artificial intelligence (AI). AI involves using software and systems to handle tasks that would normally be assigned to humans. Based on a report issued earlier this year by PwC, AI is estimated to add $15.7 trillion to the global economy by 2030, with its impact being most-pronounced in China and North America.
The reason these 11 billionaires chose Nvidia is simple: Nvidia accounts for the lion's share AI-driven GPUs found in high-compute data centers. With businesses not wanting to be left behind as Wall Street's next big trend takes shape, Nvidia is seeing otherworldly demand for its A100 and H100 AI GPUs.
But not everything is perfect for this Wall Street darling. For instance, U.S. officials are considering additional curbs on what AI-driven GPU's Nvidia can export to China. The world's No. 2 economy generates a sizable amount of annual revenue for Nvidia.
The other potential issue for Nvidia is its valuation. Although the ramp-up in its growth rate from AI has been jaw-dropping, so is the company's multiple relative to its cash flow -- 226 times trailing-12-month cash flow. An argument can be made that Nvidia has never been pricier, which may limit its upside moving forward.
