Investors may remember 2022 as the year that stock splits came back. After a relative lack of splits in recent years, stocks with high nominal prices embraced the concept in increasing numbers this year.
Splits change nothing financially. One share at $1,000 holds the same value as 10 shares worth $100 each.
Still, the lower nominal price draws interest to the stock and makes it easier for small investors to buy whole shares. Such attributes can help boost the fortunes of Amazon (AMZN -0.24%), Tesla (TSLA -2.51%), and Alphabet (GOOGL -1.72%) (GOOG -1.69%).
Tech appears to lead this retailer’s gains after the split
Will Healy (Amazon): Amazon may have sparked a trend when it announced its 20-for-1 stock split in March. This was its first split since 1999, and a few other companies followed its lead.
But despite that possible influence, it seems the reasons not to buy Amazon have moved to the forefront. In the current inflationary environment, consumers have lower buying power. This does not help Amazon, as 84% of its revenue came from its North America and international segments. Each segment also reported negative operating income.
However, the other 16% came from Amazon Web Services (AWS), Amazon’s cloud computing arm. It grew revenue by 35% in the first six months of 2022 versus the same period in 2021. In comparison, the overall company increased revenue by 7% over this same period.
Moreover, it generated $12 billion in operating income for the first two quarters of the year, more than compensating for the $5 billion in operating losses for the other two segments during that time. Hence, AWS would have made the company profitable if not for valuation losses in equity securities and other noncore activities.
Amazon has also recently begun publishing digital advertising figures. Given its performance, it looks increasingly like a formidable competitor to Alphabet and Meta Platforms. In the first half of 2022, digital ads generated $17 billion in revenue, a 20% increase from last year.
Still, even with such green shoots, Amazon has fallen 25% over the last year, lagging the S&P 500. This comes at a time when falling profits have taken its P/E ratio to nearly 120.
Amazon’s price-to-sales (P/S) ratio stands at 3 after falling to multiyear lows early in the year. This is less than emerging fulfillment rival Shopify at an 8 P/S ratio and cloud rival Microsoft at 10 times sales. As cloud and ad growth continue amid an increasingly challenging environment, investors may consider taking advantage of Amazon’s lower, split-adjusted price.
Tesla has strong financials and multiple long-term growth opportunities
Justin Pope (Tesla): Electric vehicle manufacturer Tesla recently completed its latest split, a 3-for-1 move that brings the stock’s share price down to roughly $275, a more digestible figure for most investors. Tesla is one of the most successful investments of the past 15 years, turning a $10,000 investment at its initial public offering into almost $2 million.
People were once skeptical of Tesla’s electric vehicle ambitions, but today the company is widely considered the industry leader and carries a market cap of $870 billion. More importantly, Tesla’s increasing production volumes have pushed the business to profitability. The company generated nearly $7 billion in free cash flow over the past year, adding to a cash hoard of roughly $16 billion after subtracting debt.
Despite Tesla’s success thus far, its future remains bright; the company produced roughly 258,000 vehicles in the second quarter of this year, which projects to just over a million units for an entire year. Worldwide new vehicle sales total roughly 66 million units annually, but just 10% of those were EVs in 2021. Tesla’s global EV market share is currently about 14%, so Tesla’s business could grow along with the EV category if people continue converting from gas to electric.
The stock is at a price-to-earnings ratio (P/E) of just under 100, which seems expensive at roughly five times the valuation of the S&P 500 until you consider the company’s growth estimates. Analysts are calling for annual earnings-per-share (EPS) growth of 31% over the next three to five years, which means the company could grow into its lofty valuation over time.
Tesla probably won’t match the returns it created over the past 15 years, but the ingredients are there for the company to compound your investment over the coming years. CEO Elon Musk is among the most ambitious executives on Earth; he has a long list of projects that could each take the company to the next level, including new vehicle models, work in artificial intelligence, and perhaps even walking robots.
Alphabet’s impressive revenue is driven by its significant share of the digital advertising market
Jake Lerch (Alphabet): On July 15, Alphabet executed a 20-for-1 stock split, which lowered the price of a single share from over $2,000 to just above $100. This stock split was great for several reasons. First, it’s now easier for retail investors, particularly those with smaller accounts, to purchase shares of Alphabet without delving into the sometimes confusing world of fractional shares. Second, Alphabet’s stock split opens the door for the company to be added to price-weighted indexes, such as the Dow Jones Industrial Average.
Setting aside the stock-split catalysts, Alphabet remains a force to be reckoned with. The company has generated $278 billion in revenue over the last 12 months and is on pace to generate more than $300 billion in 2023. The power behind Alphabet is its large share of the digital advertising market, thanks to its Google Search segment, which places targeted ads within its search engine results.
Despite Alphabet’s abundance of popular products, such as YouTube, Gmail, and Google Cloud, shares of the company remain attractive on a valuation basis. Alphabet trades at a P/E multiple of only 20.5. That’s close to its all-time low and far below its 10-year average of 30.9.
Savvy investors will be using recent market weakness to load up on this name — before the opportunity slips away.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet (C shares), Amazon, and Tesla. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in Shopify. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., Microsoft, Shopify, and Tesla. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.