Volatility has been the name of the game on Wall Street since this decade began. The major indexes have vacillated between bear and bull markets since the start of 2020, which has encouraged investors to seek out the safety of companies that have long track records of outperformance.
While the FAANG stocks have been a popular choice for ages, it's stocks enacting splits that have really drawn investors' attention over the past two years.
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Investors can't get enough of stock-split stocks
A stock split is an event which allows a publicly traded company to alter its share price and outstanding share count without having any impact on its market cap or operating performance. This purely cosmetic change can make shares more nominally affordable for investors without access to fractional-share purchases, or can be used to increase the share price of a publicly traded company to ensure it meets the minimum listing standards for major exchanges.
Most investors tend to pile into companies enacting forward-stock splits, which reduces a company's share price and increases its outstanding share count by the same factor. Businesses enacting forward splits are usually out-executing and out-innovating their competition.
Since the start of July 2021, nine high-profile companies have enacted stock splits (listed in chronological order by the effective date of their split):
- Nvidia (NVDA 6.18%): 4-for-1 split conducted in July 2021
- Amazon (AMZN 3.43%): 20-for-1 split conducted in June 2022
- DexCom (DXCM -9.90%): 4-for-1 split conducted in June 2022
- Shopify (SHOP 1.11%): 10-for-1 split conducted in June 2022
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split conducted in July 2022
- Tesla (TSLA -1.11%): 3-for-1 split conducted in August 2022
- Palo Alto Networks (PANW 0.91%): 3-for-1 split conducted in September 2022
- Monster Beverage (MNST 0.41%): 2-for-1 split conducted in March 2023
- Novo Nordisk (NVO 0.84%): 2-for-1 split conducted in September 2023
These are all businesses that offer well-defined competitive advantages and/or sustained double-digit growth catalysts -- and their share price performance reflects this.
- Nvidia accounts for around 90% of all graphics processing units used in artificial intelligence (AI)-accelerated data centers.
- Amazon's e-commerce marketplace brought in nearly $0.40 of every $1 spent in U.S. online retail sales in 2022.
- DexCom is one of the two leading providers of continuous glucose monitoring systems.
- Shopify holds approximately 28% of e-commerce platform market share in the U.S.
- Alphabet's Google has totaled no less than 90% of worldwide monthly internet search share since March 2015.
- Tesla is the leading electric-vehicle (EV) manufacturer in North America, and the only profitable pure-play EV producer.
- Palo Alto Networks is one of only two cybersecurity companies to have a greater than 20% share of the network security space.
- Monster Beverage is No. 2 in U.S. energy drink market share, with just over 30%, as of 2022.
- Novo Nordisk's glucagon-like peptide-1 (GLP-1) drugs (Ozempic, Saxenda, and Wegovy) appear to be game-changers in the weight-loss department.
However, these nine high-profile stock-split stocks sport very different valuations.
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Which stock-split stock is the cheapest?
Traditionally, the price-to-earnings (P/E) ratio or forward P/E ratio -- which divides a company's current share price into Wall Street's forecast earnings per share (EPS) for the upcoming year -- are used to determine whether or not a stock is a good value. While the forward P/E ratio can be particularly useful for mature businesses, it can sometimes fail to tell the full story with growth stocks that are regularly reinvesting their operating cash flow.
With few exceptions, the stock-split stocks listed above tend to aggressively reinvest their operating cash flow into high-growth initiatives. For this reason, forward-year cash flow, not forward-year EPS, is the better value determinant among these nine high-profile stock-split stocks.
What you see below is the forward-year multiple to cash flow for each of the nine high-profile stock-split stocks:
- Amazon: 12.5
- Alphabet (Class A shares, GOOGL): 14.62
- Palo Alto Networks: 23.52
- Nvidia: 24.77
- Monster Beverage: 30.94
- DexCom: 34.49
- Tesla: 42.5
- Novo Nordisk: 61.52
- Shopify: 75.75
There are certainly surprises in this list. For instance, Nvidia and Palo Alto Networks aren't as pricey as their traditional P/E ratio suggests. By comparison, Tesla, Novo Nordisk, and Shopify are quite expensive, compared to the other stock-split stocks.
But the biggest shock of all is that Amazon is the cheapest stock-split stock, when based on forward-year cash flow.
Here's why Amazon is a phenomenal value
I'll be the first to admit that Amazon's forward-year P/E ratio of 44 isn't flattering. The company's desire to reinvest in high-growth operating segments and logistics can, at times, lead to some disappointing bottom-line results. But make no mistake about it, Amazon is a phenomenal value, and it's because of the company's rapidly growing operating cash flow.
Most investors are familiar with Amazon because of its world-leading e-commerce platform. While it's true that Amazon generates a sizable percentage of its annual sales from online retail, this is actually a low-margin segment for the company. The bulk of Amazon's operating cash flow comes from three fast-growing ancillary divisions: Amazon Web Services (AWS), advertising services, and subscription services.
AWS is, without question, the most-important puzzle piece to Amazon's success. Tech analysis company Canalys pegged AWS's global share of cloud infrastructure service spending at 30%, as of the end of June. That's world-leading market share with enterprise cloud spending still in its very early innings. Despite accounting for around a sixth of Amazon's net sales, AWS is frequently responsible for the lion's share of the company's operating income.
Amazon is also one of the most-visited websites in the world. From November 2022 through April 2023, it drew between 2.2 billion and 2.7 billion monthly visits. Garnering this many eyeballs, many of which are actively looking to purchase something, is a lure that advertisers simply can't resist. Excluding currency movements, advertising services have grown by at least 21% on a year-over-year basis in each of the past eight quarters.
Lastly, Amazon has delivered sustained double-digit, currency-neutral sales growth from its subscription services segment. The popularity of its online retail marketplace, as well as its exclusive rights to Thursday Night Football, have lifted its global Prime subscriber count above 200 million, as of April 2021. Amazon should have little issue raising annual Prime subscription prices given the value proposition it offers members.
Amazon is a well-oiled machine that's on track to more than triple its operating cash flow between 2022 ($4.59/share, reported) and 2026 ($14.88/share, estimated). If it can hit Wall Street's consensus forecast in 2026, it'll be valued at just 9 times cash flow. That's considerably below the multiple of 23 to 37 times cash flow it traded at from 2010 through 2019, and it demonstrates how much of a value Amazon stock is right now.
