1 Stock-Split Stock to Buy Hand Over Fist and 1 to Avoid Like the Plague
It was a historic year for Wall Street…for all the wrong reasons. We observed the wide range S&P500 and growth oriented Nasdaq Compound plunge into a bear market on the heels of historically high inflation, back-to-back quarterly declines in U.S. gross domestic product, and Russia’s invasion of Ukraine, which further jeopardizes the global energy supply chain.
Yet amid this tumultuous year, mainstream investors have found a source of positivity in split stocks.
Stock-split euphoria has gripped Wall Street
A stock split is a mechanism that allows a publicly traded company to change the price of its shares and the number of shares outstanding without affecting its market capitalization or operations. A forward stock split can theoretically make stocks more affordable for ordinary investors who don’t have access to fractional stock purchases with their online broker. Meanwhile, reverse stock splits can boost a company’s share price to ensure it remains compliant for listing on one of the major US stock exchanges.
Most investors are excited about forward stock splits because a company wouldn’t do a forward split if its stock price hadn’t risen significantly. And a company’s stock price wouldn’t skyrocket if it didn’t innovate more than its competitors and execute well.
In 2022, half a dozen high-profile forward stock splits were announced and/or took place:
- Alphabet (GOOGL 2.09%) (GOOG 2.16%): Announced a 20-to-1 split in February which took effect in July.
- Amazon (AMZN 2.66%): Announcement of a 20-for-1 stock split in March which was adopted in early June.
- You’re here (TSLA 3.60%): Announced plans to split in June and moved forward with a 3-for-1 split in late August.
- Shopify (STORE 8.99%): Declared a 10-to-1 split in April that was signed into law at the end of June.
- DexCom (DXCM 1.42%): Declared a 4-for-1 split in March that took place in mid-June.
- Palo Alto Networks (PANW 3.20%): Announced a 3-for-1 split in August, with an effective date of September 14.
The common theme propelling interest in these split stocks is that they are industry leaders, or at worst major players.
- Alphabet is the parent company of the Internet search engine Google and the YouTube streaming platform. The former controls 91% of the global search share, while the latter is the second most visited social site on the planet.
- Amazon is expected to generate nearly 40% of all online retail sales in the United States this year and its cloud services segment, Amazon Web Services (AWS), accounts for a 31% share of global cloud spending.
- Tesla is North America’s top-selling electric vehicle (EV) maker (the company is on track to ship more than one million EVs this year) and has achieved recurring profitability.
- Shopify is one of the world’s leading cloud-based e-commerce platforms, with the company estimating a $153 billion addressable market just for small businesses.
- DexCom has always been the world’s number one or number two supplier of continuous glucose monitoring systems for people with diabetes. In the United States, nearly half of the adult population has diabetes or prediabetes.
- Palo Alto Networks is one of the leading cybersecurity companies that is gradually moving towards a cloud-based software-as-a-service operating model.
Yet among these top-tier stock splits, one stands out as a crying buy, while another is surrounded by serious red flags.
The fractional stock to buy in spades: Alphabet
Undoubtedly the main fractional stock investors can buy their hands on right now is Alphabet, the parent company of Google, YouTube and self-driving company Waymo. While concerns over declining advertising spend may negatively impact Alphabet in the very short term, it is a company that brings lasting competitive advantages to the table.
The basis of Alphabet for more than two decades has been the Internet search engine Google. According to data from GlobalStats, Google accounted for between 91% and 93% of the global Internet search share for the two-year period. Having a true monopoly on search allows Google to have excellent ad pricing power and generate an incredible amount of cash flow.
But what should cheer the investment community the most is what Alphabet is doing with all the money it generates. For example, the company is investing heavily in its rapidly growing cloud infrastructure service, Google Cloud. Although AWS is the current king of cloud services, Google Cloud ended June with an 8% global share of cloud spend. Mid-decade, this could be a major cash driver for Alphabet.
In addition to the Cloud, Alphabet relies on the YouTube streaming platform, which attracts 2.48 billion monthly active users. As you can imagine, such strong engagement has contributed to the company’s ad pricing power and increased subscription revenue. For ad revenue alone, YouTube is approaching $30 billion in annual revenue.
Alphabet has even turned to share buybacks as a way to increase shareholder value given its strong cash flow. In April, the company’s board authorized a $70 billion share buyback.
The icing on the cake is that Alphabet is now cheaper than it ever was as a publicly traded company. Investors can buy shares of Alphabet for just 18 times Wall Street’s consensus forecast earnings in 2023, even with the high likelihood of continued double-digit sales growth throughout the decade.
Split-stock investors should avoid like the plague: Tesla
At the other end of the spectrum is a fractional stock that should be avoided at all costs: electric vehicle maker Tesla.
Obviously, Tesla wouldn’t have reached a trillion dollar valuation if it didn’t do something right. Despite semiconductor chip shortages and China’s zero-COVID strategy negatively impacting Shanghai gigafactory production, the company is consistently profitable and on track to deliver more than a million electric vehicles this year.
Optimists also cite CEO Elon Musk as a reason for Tesla’s astonishing performance since its IPO in 2010. Musk is a visionary who brought four electric vehicle models into production and helped diversify Tesla into storage products. energy and the installation of solar panels.
However, I think this perceived upside catalyst is the biggest risk for Tesla. Over time, Elon Musk has become a legal, financial and operational risk to his business that can no longer be overlooked. From his potentially distracting takeover of Twitter to his dodgy tweets that seem to draw the ire of the Securities and Exchange Commission from time to time, Musk has proven to be a significant liability.
Perhaps even more concerning is Tesla’s inability to meet or exceed Musk’s predictions. Although Musk regularly touts the upcoming release of new electric vehicles or innovations, virtually all planned release dates are pushed back — sometimes indefinitely. It’s a big deal when a significant part of Tesla’s valuation is based on these new innovations becoming reality.
The other major problem with Tesla is its valuation. While auto stocks are typically valued at a single-digit year-ahead price-earnings multiple, investors are currently paying 54 times Wall Street consensus earnings for the year ahead to own shares of Tesla.
Not only is Tesla’s business just as cyclical as traditional automakers, but the company’s competitive advantages in the electric vehicle space are already being negated by new and legacy companies. For example, a relatively new entrant, Niointroduced two EV sedans (the ET7 and ET5) that can easily outpace Tesla’s flagship sedans (Model 3 and Model S) in lineup with the best battery upgrade available.
The shine that made Tesla a game changer seems to be fading.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Sean Williams has positions in Alphabet (A shares) and Amazon. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Nio Inc., Palo Alto Networks, Shopify, Tesla and Twitter. The Motley Fool recommends DexCom and recommends the following options: Shopify January 2023 $1140 Long Call and Shopify January 2023 Short Call $1160. The Motley Fool has a disclosure policy.