Stock splits don't actually do anything to change the fundamentals of a stock, but they do get investors excited in a way that few other moves do.
There's no single reason why companies split their stocks. Often, it's because the price has hit some milestone, and the company believes a single share is too expensive. Other times, a company may do it to make individual shares more affordable to retail investors, or because the management team thinks it acts as a buy signal by resetting the share price.
Though the split has no effect on the value of a stock -- it's like splitting a pie into more pieces -- there is some evidence that a stock split can lead to outperformance the following year. This is likely a consequence of the momentum the stock had going into the split, and possibly some market psychology since investors will buy the stock-split stock if they believe the split will make it go higher.
Stock splits have slowed from their pace a year or two ago, but let's take a look at two recent stock splits to see if either of them is worth buying.
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1. Amazon
Amazon (AMZN 3.43%) had one of the highest-profile stock splits in recent memory when it issued a 20-for-1 split last year, the company's first stock split in more than 20 years.
Since the split went into effect on June 3, 2022, Amazon stock is up 5.8%, a virtually identical return to the S&P 500, though Amazon has been much more volatile.
Amazon stock has rebounded from its low point at the beginning of the year. The company has shown modest revenue growth acceleration, and profitability improved after it laid off 28,000 corporate employees and axed or trimmed several unprofitable business lines.
However, that approach under CEO Andy Jassy shows the company is facing a new set of challenges. Revenue growth has slowed as it has gotten bigger, and there are still obstacles toward it realizing its profit potential.
Revenue rose 11% in the second quarter to $134.4 billion, and operating income jumped from $3.3 billion to $7.7 billion as the company flipped in the quarter a year ago in its e-commerce division. However, revenue growth at Amazon Web Services slowed to just 12%, its slowest growth rate ever, and profits actually fell from $5.7 billion in the quarter a year ago to $5.4 billion. Management said that customers have become more cost-conscious and are slower to expand.
If you're thinking of buying Amazon stock, it's not too late to do so, but you should temper your expectations of its growth potential. This is not the Amazon of old that was able to deliver monster growth year in and year out. The company is more mature now, and approaching $600 billion in annual revenue. The stock's greatest opportunity is in expanding its profit margins rather than growing the top line.
2. Monster Beverage
One stock-split stock that's gotten less fanfare than Amazon is Monster Beverage (MNST 0.41%), the energy drink company.
The company issued a two-for-one stock split in the form of a stock dividend and the stock started trading at the split-adjusted price on March 28. Since then, shares are up 6%, slightly underperforming the S&P 500, which rose 9% during that time.
Like Amazon, Monster Beverage has delivered massive returns over its history. The stock is up an incredible 67,000% since its IPO in 1985 when it was known as Hansen Natural.
These days, Monster continues to put up steady growth. Revenue rose 12.1% to $1.85 billion in the second quarter, and net income jumped by a whopping 51% to $413.9 million as the company raised prices and enjoyed lower freight and aluminum can costs.
Monster continues to grow both organically and through acquisitions, acquiring Bang Energy in July. It's expanded into alcohol with its acquisition of CANarchy, a craft beer and hard seltzer company, for $330 million last year.
The beverage sector has produced more than a few big winners, and based on its current growth on the top and bottom lines and the huge addressable market it operates in, there's plenty of reason to believe Monster stock still has upside opportunities from here.
The stock isn't cheap, trading at a price-to-earnings ratio of 40, but the company has the track record, proven execution, and growth opportunity to justify a premium.
