One of the most noteworthy investing developments over the past couple of years has been the return to popularity of stock splits. Investors need no longer concern themselves with buying shares in round lots of 100 shares, thanks to the debut of low- and no-cost trading, and brokerages now commonly offer investors the option of buying fractional shares.
Yet after years of consistent performance, some stocks currently trade for north of $1,000 per share, making these quality companies less accessible to less affluent investors.
A look back at 2022 -- when numerous investor-favorite companies split their shares -- helps illustrate this trend.
- Amazon implemented a 20-for-1 split, effective on June 3, 2022
- DexCom decreed a 4-for-1 split, effective on June 10, 2022
- Shopify enacted a 10-for-1 split, effective on June 28, 2022
- Alphabet completed a 20-for-1 split, effective on July 15, 2022.
- Tesla finished a 3-for-1 split, effective on Aug. 24, 2022.
- Palo Alto Networks executed a 3-for-1 split, effective on Sept. 13, 2022.
Since stock splits don't have any real effect on the underlying value of the business, some investors dismiss the practice as unnecessary and even view it as a gimmick. Yet as a review of the above list attests, some of the most high-profile companies around still see the value in keeping their shares affordable on a per-spare basis for retail investors.
The general market rebound so far this year has driven up the stock prices of some popular businesses, thereby justifying a maneuver that would cut their per-share prices. Here are three stocks that could initiate splits in the near future.
Image source: Getty Images.
1. MercadoLibre
A decline in consumer discretionary spending weighed on a broad cross-section of online retailers in 2022, but not all e-commerce businesses are created equal.
MercadoLibre (MELI 3.09%) is the leading e-commerce and digital payment services provider in Latin America, and it continued to do brisk business last year. As others struggled, MercadoLibre thrived, fueled by its integrated ecosystem, which not only includes digital retail and payments services, but also logistics, delivery, digital wallet, investing, digital advertising, and online storefronts.
The company delivered record results in 2022. Revenue rose 49% to $10.5 billion, while net income soared by 481% to $482 million. Its winning streak continues, as highlighted by its record-setting performance so far this year. For the first six months of 2023, revenue jumped 33% to $6.5 billion, while net income soared 146% to $463 million.
Over the past decade, its results have been even more eye-catching. Revenue has surged 2,680%, while net income is up 795%. This performance has fueled the company's surging stock price, which is up more than 954%, recently topping out at $1,423 -- a figure that makes MercadoLibre ripe for its first-ever stock split.
2. Booking Holdings
The past several years wreaked havoc on the travel industry, but demand has recovered with gusto. Many expect that summer 2023 will prove to have been the busiest travel season ever, and Booking Holdings (BKNG 0.53%) is poised to reap the rewards.
CEO Glenn Fogel addressed the issue, saying, "We continue to see robust leisure travel demand ... and we are currently preparing for what we expect to be a record summer travel season in the third quarter." Investors have been equally enthusiastic, pushing the stock to a new all-time high in August. It's now just 4% or so below that peak.
The company is well positioned to profit from these secular tailwinds, backstopped by a family of consumer-facing brands that includes Priceline, Agoda, Rentalcars.com, KAYAK, OpenTable, and -- of course -- Booking.com.
In the second quarter, business was brisk, with 268 million room nights booked and gross bookings of $39.7 billion, representing year-over-year growth of 9% and 15%, respectively. Excluding the impact of changing foreign exchange rates, gross bookings grew 16%. This resulted in total revenue of roughly $5.5 billion, up 27% year over year, while net income soared 51% to $1.3 billion.
Even in the wake of the worst stock market downturn since 2008, Booking Holdings stock has come roaring back, recently clocking in at $3,182 per share, making it a prime candidate for a stock split.
3. Chipotle Mexican Grill
The worst economy in years wasn't enough to lessen consumers' desire for Chipotle Mexican Grill (CMG 2.41%). Hardy sales, durable pricing power, and a robust digital channel buoyed demand for the burrito slinger.
One of the company's most significant strategic growth drivers has been Chipotle Rewards. The loyalty program boasts more than 30 million members, making it one of the largest such programs in the industry. Members contribute to the success of Chipotle's digital order and pickup strategy, which continues to outperform dine-in sales. In the second quarter, digital sales increased by 38% year over year, while in-restaurant sales increased by 16%.
This helps fuel the company's Chipotlane strategy. The company has been adding dedicated food assembly lines and drive-thru lanes to its restaurants to facilitate mobile order pickup. Late last year, it announced the opening of its 500th Chipotlane location, improving the customer experience and significantly increasing sales, profit margins, and return on invested capital.
The company's focus on these winning strategies has helped backstop its growth even as inflation cut into consumers' disposable incomes. In 2023's second quarter, revenue grew 14% to $2.5 billion, while net income surged 32%.
Over the past decade, its revenue climbed 204%, driving net income growth of 309%. In response, investors bid up Chipotle's share price over that span by more than 348%. As a result, Chipotle's stock -- recently priced at around $1,922 -- could be ripe for its first-ever split.
Data by YCharts.
The fine print
While each of these stocks crushed the performance of the broad market indexes over the past decade, they now carry commensurately lofty valuations. Chipotle, Booking Holdings, and MercadoLibre are trading for 5 times, 5 times, and 4 times next year's sales, respectively. Most experts agree a reasonable price-to-sales ratio is between 1 and 2.
That said, given each company's history and strong track record of performance, they arguably deserve to trade at slight premiums.
