Investor psychology is a big deal in financial markets. And public companies often enact stock splits, which involve dividing each of their shares by a certain amount to reduce the price without changing the company's overall value. Splits can make a stock more liquid and appealing to smaller investors, which is a bullish sign.
Let's discuss why Amazon (AMZN 3.43%) and Shopify (SHOP 1.11%) could continue rewarding investors after their recent stock splits.
1. Amazon
Since its initial public offering in 1997, Amazon has undergone four stock splits to manage its soaring price growth. The most recent split (20-for-1) happened in mid-2022, and it preceded a significant rally that has seen shares jump 54% in 2023 alone as investors look optimistically at new tailwinds such as cost-cutting and artificial intelligence (AI).
With a market cap of $1.7 trillion, Amazon is one of the biggest companies in the world. And it didn't get there by accident. Under the leadership of former CEO Jeff Bezos, the e-commerce giant rapidly gained market share by prioritizing long-term growth over profits and putting customer satisfaction above all else. But now that the business is mature, its bottom line will likely be a key driver of future shareholder returns.
In the first quarter, revenue increased by a modest 11% year over year to $134.4 billion. But operating income more than doubled to $7.7 billion, driven by a swing back to profitability in North American e-commerce as cost-cutting efforts (Amazon laid off 27,000 staff in 2023) start to bear fruit. The company is also leaning into AI through a platform called Bedrock, designed to help cloud computing clients build custom generative AI applications within Amazon Web Services.
With a forward price-to-earnings (P/E) multiple of 42, Amazon stock isn't cheap compared to the S&P 500 average of 25. But the premium seems fair, considering it is a blue chip company with plenty of room to improve its profitability over the long term.
2. Shopify
Shopify's most recent stock split (10-for-1) occurred in June 2022. Since then, shares have risen roughly 60% as the company regains its growth trajectory. While the stock isn't cheap from a valuation perspective, its pathway to profitability helps justify the high price tag.
Unlike Amazon, which generates most of its revenue from its third-party e-commerce marketplace, Shopify aims to provide the tools and services for small businesses to build their own online stores by handling payments, fulfillment, and other tasks. After the pandemic, the company faced slowing growth as the stay-at-home craze ended and challenges like inflation ate into consumer purchasing power. But now, Shopify's business has begun to regain its long-term momentum.
Image source: Getty Images.
Second-quarter revenue jumped 31% year over year to $1.7 billion, a sharp improvement from this time in 2022 when sales only increased 16% against the prior-year period. The company is also moving closer to profitability, with its adjusted operating income jumping to $146 million from a loss of $42 million as it scales up. While this figure adds back one-time non-cash charges related to the sale of Shopify's logistics arm, it gives investors a good idea of the company's bottom-line trajectory.
With a price-to-sales multiple of 11, Shopify shares are much more expensive than the S&P 500 average of 2.4. But the premium looks justified considering it is a growth stock with a compelling business model and a clear pathway to sustainable operational profitability.
Focus on the fundamentals
While Amazon and Shopify's recent stock splits preceded significant share price rallies, investors should focus on the fundamentals. While a stock split can lead to a near-term boost of interest and volume, a company's operational results are what help it maintain and increase its momentum. With improving bottom lines and catalysts for continued success, Amazon and Shopify look like great buys.
