Over the past four years, Wall Street has been particularly volatile, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite swinging back and forth between bear and bull markets on a couple of occasions.
Though volatility is perfectly normal for the broader market, heightened vacillations in equities often lead investors to seek out the safety of profitable, time-tested companies. For the past decade, the FAANG stocks have served as something of a safety blanket for investors. But over the past two years and change, stocks enacting splits have also fit the bill.
Image source: Getty Images.
A stock split is an event that allows a publicly traded company to alter its share price and outstanding share count without any impact to its market cap or operating performance. It's a cosmetic change that can reduce a company's share price to make it more nominally affordable for everyday investors (what's known as a "forward-stock split"), or can increase a company's share price to ensure continued listing on a major stock exchange (a "reverse-stock split").
While there are some instances of companies thriving following a reverse-stock split, most investors are focused on high-flying businesses enacting forward splits. That's because companies conducting forward splits have typically out-executed and out-innovated their competition.
Since the start of July 2021, nine prominent companies have enacted forward 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
The outperformance of these nine stock-split stocks isn't lost on Wall Street's smartest and most-successful money managers, either. Based on the latest round of Form 13F filings with the Securities and Exchange Commission, billionaires have absolutely piled into three stock-split stocks ahead of 2024.
Amazon
The first stock-split stock billionaire investors clearly want to own ahead of 2024 is e-commerce company Amazon. According to 13Fs, 10 prominent billionaires purchased shares of Amazon stock during the September-ended quarter, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (5,042,696 shares)
- Ole Andreas Halvorsen of Viking Global Investors (4,348,680 shares)
- Steven Cohen of Point72 Asset Management (1,171,081 shares)
- David Siegel and John Overdeck of Two Sigma Investments (883,205 shares)
- Ken Fisher of Fisher Asset Management (665,738 shares)
- David Tepper of Appaloosa Management (587,500 shares)
- Dan Loeb of Third Point (580,000 shares)
- Stephen Mandel of Lone Pine Capital (569,245 shares)
- Chase Coleman of Tiger Global Management (239,760 shares)
The primary reason to own shares of Amazon in 2024 is the company's rapidly rising operating cash flow. Though Amazon is best-known for its world-leading online marketplace, online retail sales aren't responsible for much, if any, of the company's operating cash flow. Instead, investors are mostly focusing on the company's ancillary operations.
Amazon Web Services (AWS) looks to be its crown jewel. Enterprise cloud spending is still in its early stages, and AWS is currently accounting for close to a third of global cloud infrastructure service spending. Even though AWS only contributes around a sixth of Amazon's net sales, it's responsible for a majority of its operating income.
Subscription services and advertising services are two additional ancillary segments that are delivering in a big way for Amazon and its shareholders. Amazon has well over 200 million global Prime subscribers, which is leading to highly predictable revenue and cash flow. Meanwhile, the company drives more than 2 billion visitors to its website each month. That's a tantalizing proposition for merchants, which is contributing to Amazon's top-tier ad-pricing power.
As wild as this might sound, there's also a value proposition with Amazon. While it's not inexpensive in a traditional sense (i.e., using the price-to-earnings (P/E) ratio), shares are cheaper than they've ever been relative to consensus forward-year cash flow. Since Amazon reinvests most of its operating cash flow back into its business, cash flow is, arguably, a better valuation measure than P/E.
Alphabet
A second stock-split stock that some of the smartest billionaire fund managers want to own ahead of 2024 is Alphabet. The latest round of 13Fs show that nine billionaires added Class A shares (GOOGL) during the third quarter, including (total shares purchased in parenthesis):
- Stephen Mandel of Lone Pine Capital (3,113,001 shares)
- Bill Ackman of Pershing Square Capital Management (2,169,824 shares)
- Chase Coleman of Tiger Global Management (1,523,000 shares)
- Ken Griffin of Citadel Advisors (1,498,213 shares)
- David Siegel and John Overdeck of Two Sigma Investments (1,195,541 shares)
- Ken Fisher of Fisher Asset Management (1,023,535 shares)
- Israel Englander of Millennium Management (602,822 shares)
- Steven Cohen of Point72 Asset Management (544,495 shares)
Among the nine stock-split stocks listed above, perhaps none has a moat more secure than Alphabet's internet search engine Google. In November, Google claimed almost 92% of worldwide internet search share, and it's held at least a 90% monthly share of internet search dating back more than eight years.
Businesses wanting to target users via search understand that Google gives them the best chance to do so. As a result, Alphabet's foundational operating segment generates abundant operating cash flow and usually has phenomenal ad-pricing power.
Similar to Amazon, billionaires are likely also enamored by the growth of Alphabet's cloud infrastructure service segment. Google Cloud has gobbled up a 10% share of worldwide cloud infrastructure service spending, based on third-quarter estimates from tech-analysis firm Canalys. This is a segment capable of sustained double-digit growth that's delivered three consecutive quarterly profits following years of losses. In other words, Alphabet looks to have found its next cash-flow driver.
Alphabet is currently valued at 14 times forward-year cash flow and 20 times forward-year earnings. Both figures are historically cheap compared to where Alphabet's stock has traded over the past five years.
All eyes are on Tesla's Cybertruck as deliveries begin. Image source: Tesla.
Tesla
The third stock-split stock billionaires are absolutely piling into ahead of 2024 is electric-vehicle (EV) maker Tesla. The September-ended quarter saw four successful billionaire investors add to their funds' existing position in Tesla, including (total shares purchased in parenthesis):
- David Siegel and John Overdeck of Two Sigma Investments (644,638 shares)
- Jeff Yass of Susquehanna International (603,898 shares)
- Israel Englander of Millennium Management (407,695 shares)
The lure for billionaires to North America's leading EV manufacturer may have to do with its recent launch of the Cybertruck (deliveries began on Nov. 30). CEO Elon Musk previously noted that refundable deposits for the Cybertruck had topped 1 million. If a significant percentage of these deposits turn into actual orders, Tesla will have another key source of revenue.
Furthermore, Tesla is closing in on its fourth consecutive year of profitability, based on generally accepted accounting principles (GAAP). Whereas the EV divisions of new and legacy automakers are deeply in the red, Tesla's operating model continues to shine.
However, it may not be all peaches and cream in 2024 for Tesla. Musk noted during the company's annual shareholder meeting in May that Tesla's pricing strategy is based on demand. More than a half-dozen price cuts for Model's 3, S, X, and Y in 2023, coupled with rising inventory levels over the past two years, suggests the world's largest automaker by market cap has a demand problem. The company's operating margin has been more-than-halved (17.2% to 7.6%) over the trailing year, ended Sept. 30.
What's more, Elon Musk has proven to be a significant liability for Tesla. Though he's overseen plenty of innovation, he's also come under scrutiny by securities regulators on a couple of occasions. Additionally, Musk has made countless promises regarding innovations and new products/services that have simply never come to fruition.
