Don't look now, but Wall Street's broadest stock indexes, the benchmark S&P 500 and growth-focused Nasdaq Composite, are back in correction territory, as of the closing bell on Oct. 27.
Typically, when the sledding gets tough on Wall Street, investors seek the safety of profitable, time-tested, outperforming businesses. Over the past two years, this definition has perfectly encompassed a handful of companies enacting stock splits.
A stock split is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count without having any impact on its market cap or operating performance. A forward-stock split reduces a company's share price, thereby making it more affordable for everyday investors who don't have access to fractional-share purchases with their online broker.
Meanwhile, reverse-stock splits increase a publicly traded company's share price, usually with the purpose of ensuring it meets the minimum listing standards for a major stock exchange.
Image source: Getty Images.
Forward-stock splits are what tend to garner the attention of investors. That's because companies enacting forward splits are often industry leaders and top-notch innovators whose high-flying stock price reflects this outperformance, relative to their peers.
Since the start of July 2021, nine high-flying companies have conducted forward-stock splits:
- Nvidia (NVDA 6.18%): 4-for-1 split
- Amazon (AMZN 3.43%): 20-for-1 split
- DexCom (DXCM -9.90%): 4-for-1 split
- Shopify (SHOP 1.11%): 10-for-1 split
- Alphabet (GOOGL 10.22%) (GOOG 9.96%): 20-for-1 split
- Tesla (TSLA -1.11%): 3-for-1 split
- Palo Alto Networks (PANW 0.91%): 3-for-1 split
- Monster Beverage (MNST 0.41%): 2-for-1 split
- Novo Nordisk (NVO 0.84%): 2-for-1 split
While all nine of these businesses bring easily identifiable competitive advantages to the table, their outlooks over the next five to 10 years differ greatly. As we move into November, one of these nine stock-split stocks is effectively cheaper than it's ever been as a publicly traded company -- while another stock-split stock looks completely avoidable as it contends with mounting headwinds.
The stock-split stock to buy hand over fist in November: Alphabet
The screaming bargain in November, among the aforementioned nine stock-split stocks, is Alphabet. This is the parent company of familiar internet search engine Google and streaming platform YouTube, among other ventures.
If there's a weakness in Alphabet's armor, it's that the company is cyclical. Nearly 78% of the $76.7 billion in total sales reported in the September-ended quarter derived from its advertising services. Advertising is notoriously cyclical, with businesses not shy about paring back their spending at the first signs of economic weakness. Given that a handful of economic data points and predictive tools are signaling a coming recession, it's possible that Alphabet's primary revenue driver could weaken in the coming quarters.
But this is a two-sided coin -- and the two sides aren't remotely equal.
Even though U.S. recessions are a perfectly normal part of the economic cycle, they're traditionally short-lived. Just three of the 12 recessions following World War II lasted at least 12 months, and none of the remaining three surpassed 18 months. Meanwhile, most periods of expansion have extended beyond one year. In other words, the ad industry is poised to thrive over long stretches.
Few businesses are more perfectly positioned to take advantage of long-winded economic expansions than Alphabet. Google accounted for close to 92% of worldwide internet search share in September 2023, and it's amassed at least a 90% monthly share of global internet search dating back to April 2015. It's the unquestioned go-to for businesses looking to advertise, which means Google possesses exceptionally strong ad-pricing power.
Beyond its bread-and-butter cash-flow driver, Alphabet should enjoy meaningful growth from YouTube and Google Cloud. The former is the second most-visited site globally, and has seen daily views of short-form videos, known as Shorts, catapult higher over the past two years.
Google Cloud is a particularly intriguing long-term growth catalyst. Enterprise cloud spending is still in its early stages, and Google Cloud already accounts for an estimated 9% of cloud infrastructure service spending, based on a second-quarter report from tech analysis firm Canalys. Although Google Cloud's year-over-year growth rate has "slowed" to 22.5%, as of the September-ended quarter, it's generated three consecutive quarters of operating profits following years of losses.
Most importantly, this unquestioned industry leader is pretty much cheaper than it's ever been as a publicly traded company. Shares of Alphabet can be purchased right now for less than 13 times consensus cash flow per share in 2024. By comparison, shares of the company have averaged a multiple of just over 18 times year-end cash flow between 2018 and 2022.
Alphabet is a surprisingly cheap stock that patient investors can confidently buy hand over fist.
The Model 3 is Tesla's top-selling sedan. Image source: Tesla.
The stock-split stock to avoid in November: Tesla
However, past performance is no guarantee of future success. In November, electric-vehicle (EV) manufacturer Tesla stands out as the clear stock-split stock worth avoiding.
Tesla has done a number of things right in order to be valued as the world's largest automaker by market cap. It became the first auto company to build itself from scratch to mass production in well over 50 years, and is currently the only pure-play EV maker that's generating a recurring profit, based on generally accepted accounting principles (GAAP). Even though legacy automakers are quite profitable, the EV divisions of legacy auto companies are bleeding red.
Likewise, Tesla is sitting on a veritable mountain of cash. It closed out the September-ended quarter with $26.1 billion in cash, cash equivalents, and investments. With a reasonably minimal amount of debt, Tesla has more flexibility to innovate and potentially diversify its operations than its peers.
But Tesla also has plenty of drawbacks as an investment.
For example, it lacks brand power. It's a relatively young brand that takes a clear back seat to the likes of General Motors and Ford Motor Company, to name a few. These stalwarts have more than a century of history in their sails, and they can easily cross generational gaps to connect with and engage previous and future buyers.
Tesla also appears to have a pretty serious inventory problem. Since the end of the first quarter of 2022, days of supply -- i.e., ending new car inventory divided by the relevant quarters' deliveries -- has jumped from three days to 16 days, as of Sept. 30.
CEO Elon Musk has previously stated that Tesla's pricing strategy is dictated by demand for its EVs. With more than a half-dozen price cuts across its four production models since 2023 began, the implication is clear that inventory is a problem. Not surprisingly, these price cuts have more than halved the company's operating margin over the past year -- 17.2% to 7.6%.
Tesla's attempts to become more than just a car company aren't exactly hitting home, either. The SolarCity acquisition has been a money-loser for Tesla for seven years, while the remainder of Tesla's ancillary operations are generally low margin. In fact, sales in the company's Energy Generation and Storage segment have been relatively flat since the first quarter of this year.
To build on the above, 41% of Tesla's pre-tax profit in the latest quarter can be traced to interest income on its cash and automotive regulatory credits, which it sells to other automakers. These renewable energy credits are given to Tesla for free by governments. This is a sizable amount of pre-tax income that has nothing to do with selling and leasing EVs.
Finally, Tesla's valuation makes little sense. Auto companies typically trade at price-to-earnings (P/E) ratios in the mid-to-high single-digits. Tesla is commanding a P/E ratio, based on consensus 2023 earnings, of well over 60. With its operating margin declining, Tesla looks to be at risk of serious downside.
