When volatility and uncertainty rule the roost on Wall Street, investors often seek out industry-leading, time-tested businesses with a rich history of outperforming the broader market. Since July 2021, companies enacting stock splits have been at the top of the list.
A stock split is an event that allows a publicly traded company to alter both its share price and outstanding share count while having no impact on its market cap or operating performance. Consider it a purely cosmetic change designed to make a publicly traded company's shares more nominally affordable, as with a forward-stock split, or to increase a public company's share price to ensure it meets the minimum listing standards for a major stock exchange, as with a reverse-stock split.
Image source: Getty Images.
Companies conducting forward-stock splits are what investors tend to hone in on. That's because businesses angling to make their shares more nominally affordable for everyday investors are usually firing on all cylinders and outpacing their peers in the innovation department.
Since the start of July 2021, nine companies that are dominant within their respective industries have conducted forward-stock splits:
- 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.
- Novo Nordisk (NVO 0.84%): 2-for-1 split in September 2023.
These are all profitable businesses with well-defined growth catalysts. However, their outlooks differ quite a bit. As we push forward into October, one stock-split stock stands out as being historically cheap, while another widely owned stock-split stock is worth avoiding as headwinds mount.
The stock-split stock to buy hand over fist in October: Amazon
Among the nine high-profile stock-split stocks listed above, the one that makes for a phenomenal buy in October is e-commerce behemoth Amazon.
The most popular online retailer saw its shares pressured last week after the Federal Trade Commission (FTC), along with 17 states, sued the company. The FTC and involved states allege that Amazon is using its online-marketplace dominance to inflate its prices and bully competition out of the picture.
Additionally, there are concerns that Amazon's stock could be adversely impacted by a U.S. or global economic slowdown. A multitude of predictive indicators and economic datapoints do suggest a heightened likelihood of a U.S. recession. Amazon generates a large chunk of its net sales from its online marketplace.
While these headwinds are both fresh and palpable, they're not game changers, nor do they alter Amazon's growth strategy or addressable opportunities.
Although Amazon accounts for nearly 40% of online retail sales in the U.S., the company's online marketplace isn't what generates the bulk of its operating cash flow. In other words, even if online retail sales were to slow due to an economic slowdown or recession, it's not going to have much impact on Amazon's cash flow -- and that's what matters. Where Amazon generates its veritable gold mine of cash flow is from Amazon Web Services (AWS), subscription services, and advertising services.
AWS is the world's leading cloud-infrastructure service provider (30% of global cloud-infrastructure service sales in the second quarter, according to Canalys). More importantly, enterprise cloud spending is still ramping up, which bodes well for sustained double-digit growth for AWS. Even though AWS only accounts for around a sixth of Amazon's net sales, it often generates 50% or more of the company's operating income.
Amazon's subscription-services segment is playing a key role, too. In April 2021, the company surpassed 200 million Prime subscribers. Since then, Amazon's online marketplace has grown larger, and it's secured the rights to Thursday Night Football. Amazon has phenomenal pricing power with Prime, and it's encouraging users to remain loyal to its growing portfolio of high-margin products and services.
But what stands out most about Amazon is its valuation. On the surface, its trailing price-to-earnings (P/E) ratio of 100 might look downright scary. But using the traditional P/E ratio isn't the best way to value a growth company that's constantly reinvesting in its operations. Instead, measuring Amazon's multiple relative to its cash flow yields a far different take.
Whereas Amazon had regularly traded at between 23 and 37 times its year-end cash flow from 2010 through 2019, it can be purchased right now for just 11.5 times forward-year operating cash flow based on Wall Street's consensus. With the exception of the 2022 bear-market lows, this is the cheapest Amazon has ever been as a publicly traded company.
The Model 3 is Tesla's flagship electric sedan. Image source: Tesla.
The stock-split stock to avoid in October: Tesla
However, the sun may not shine on all nine of these top-performing stock-split stocks. In particular, electric vehicle (EV) manufacturer Tesla appears poised for a breakdown.
Before digging into what ails Tesla, let's give it credit for becoming the first automaker in more than a half-century to build itself from the ground up to mass production. Tesla looks to be on track to hit its production target of 1.8 million EVs in 2023 and could potentially surpass 2 million EVs annually based on the capacity of its four existing gigafactories.
Furthermore, Tesla is the only EV pure play that's profitable on a recurring basis. The company has generated three consecutive years of generally accepted accounting principles (GAAP) profits and looks to be well on its way to making it four in a row in 2023. Nevertheless, there are still plenty of reasons for investors to hit the brakes.
Let's start with the price war that Tesla kicked off to begin 2023. Some of the company's EV models have seen more than a half-dozen price cuts since the year began. CEO Elon Musk has been very clear that his company's pricing strategy has everything to do with demand. In short, Tesla continuing to slash the selling price on Models 3, S, Y, and X suggests that competition is picking up and inventory levels remain stubbornly high. Tesla's operating margin has been nearly halved since the end of September 2022, and it'll likely worsen as price cuts continue.
To build on this point, Tesla is far from the only show in town. While it still holds the No. 1 spot in North American market share, legacy automakers are beginning to hit their stride. Keep in mind that giants like General Motors and Ford Motor Company not only have deep pockets, but they possess more than a century of brand power that Tesla simply can't match. Meanwhile, BYD looks to be doing donuts around Tesla in China.
Another problem with Tesla is its leadership. To be frank, Elon Musk has a habit of overpromising and underdelivering. Whether its new innovations, such as Level 5 autonomy for the company's EVs, or the introduction of a new model, such as the Cybertruck, Musk and his company almost always fail to deliver new innovations or products in a timely fashion. While it's perfectly fine to try and fail, Tesla's valuation assumes nothing but success, which has been far from the case.
This brings me to my final point: Tesla's valuation makes no sense. Most auto stocks trade at a high single-digit earnings multiple. Tesla is commanding a P/E ratio of roughly 74 based on Wall Street's consensus-earnings forecast for this year.
While some folks might point to Tesla's ancillary operations as reasons for this premium, the company's ancillary operations are either losing money hand over fist (e.g., solar) or generating relatively low margins (e.g., supercharger network). Tesla has struggled to become more than a car company, which means valuing it like a game-changing tech stock makes no sense.
