It’s been quite the year for Wall Street and everyday investors. The S&P 500 and Nasdaq Composite have plunged into a bear market; the U.S. inflation rate hit its highest level in more than 40 years; and the U.S. appears to be near a recession following back-to-back quarters of gross domestic product (GDP) declines.
Yet amid these challenges, investors have found a silver lining with stock-split stocks. A stock split is what allows a publicly traded company to alter its share price and outstanding share count without impacting its market cap or operations. A forward stock split makes shares more nominally affordable for everyday investors who might not have access to fractional-share purchases with their online broker.
The reason investors seem to love stock splits so much is because a company’s share price wouldn’t be high enough to merit a split if it weren’t doing something right. Companies that announce and enact stock splits are often profitable, highly innovative, and maintain some level of competitive edge over their competition.
The Tesla stock split is now complete, and other stock-split stocks look more attractive
One of this year’s most-anticipated stock splits was enacted last week. Electric-vehicle (EV) manufacturer Tesla (TSLA -1.14%), which announced its intention to split in June, moved forward with a 3-for-1 forward split on Aug. 25. Retail investors who can’t buy fractional shares now only have to save up a little less than $300 to purchase a single share, as opposed to about $900 prior to the split.
Tesla has long been a popular stock because of its production ramp — the company is on pace to top 1 million EVs produced and delivered in 2022 — and its push to recurring profitability. Tesla shareholders have also embraced outspoken CEO Elon Musk. Under Musk’s leadership, Tesla has expanded its revenue stream to include energy products and solar panel installation and introduced four EV models that are currently in production.
But not even a stock split can hide Tesla’s biggest liability, which happens to be Elon Musk. As I recently opined, Musk brings significant legal, financial, and operating risks to the table that make Tesla an extremely risky stock to own at a nosebleed forward-year valuation of 54 times Wall Street’s forecast earnings per share.
While Musk has led Tesla to mass production, few of the future-looking statements about new product or service unveils have come true. That’s a serious problem, given that Tesla’s premium valuation hinges on these innovations becoming reality in a timely manner.
All this being said, here are three recent stock-split stocks that I believe are far better buys than Tesla right now.
An argument can easily be made that FAANG stock Alphabet (GOOGL -0.83%) (GOOG -0.86%) is the top stock-split stock to buy at the moment. Alphabet is the parent company of internet search engine Google, streaming platform YouTube, and autonomous car company Waymo, among other subsidiaries. It completed a 20-for-1 forward split on July 18.
There’s been a lot of recent concern about an advertising slowdown, which would certainly impact Alphabet’s ad-driven business model. But these worries overlook the fact that economic contractions and/or recessions don’t last very long. Alphabet’s ad-focused model thrives because of its competitive advantages and the fact that the U.S. and global economy spend a disproportionate amount of time expanding.
Alphabet’s foundation continues to be Google, which has accounted for between 91% and 93% of worldwide internet search share over the past two years, according to GlobalStats. With a veritable monopoly in internet search, it’s not hard for the company to command significant ad-pricing power with merchants.
However, Alphabet’s future growth prospects are brightest with its ancillary operating segments. While Google should remain a cash-flow kingpin for a long time to come, investors are really excited about YouTube growing into the second-most-visited social site in the world, and Google Cloud becoming the third-largest cloud infrastructure services provider globally.
Though Google Cloud is currently a money-losing operating segment for Alphabet, cloud service margins are usually considerably higher than advertising margins. By mid-decade, Google Cloud should be playing a key role in lifting Alphabet’s operating cash flow.
The cherry on top is that Alphabet has never been cheaper on the basis of forward-year earnings and future cash flow than it is now. This makes it a screaming buy for patient, growth-seeking investors.
A second stock-split stock that would be a much smarter buy than Tesla right now is medical device company DexCom (DXCM -1.31%). DexCom, which is known for its continuous glucose monitoring (CGM) systems, enacted a 4-for-1 forward stock split on June 13.
The biggest knock against DexCom is its valuation. During bear markets, Wall Street and investors quickly lose interest in companies that are valued at nosebleed multiples to sales and/or profits. In DexCom’s case, the company is trading at north of 100 times Wall Street’s forecast earnings in 2022.
So why should DexCom receive a pass for its premium valuation and not Tesla? There are a few good reasons.
First, healthcare stocks are highly defensive, whereas EVs aren’t. No matter how poorly the stock market or U.S. economy perform, or how high inflation flies, people are still going to need prescription drugs, medical devices, and healthcare services. Just because Wall Street had a bad couple of months doesn’t mean diabetics stop requiring care.
To build on this point, DexCom’s potential pool of patients keeps growing. The most recent update from the Centers for Disease Control and Prevention (CDC) shows that 37.3 million Americans have diabetes. Further, an estimated 96 million people have prediabetes, which can lead to diabetes if left untreated. This means almost half the adult population in this country is a potential future client, based on these figures.
DexCom has also maintained the No. 1 or No. 2 spot in global CGM share for many years. Between its innovation — the company has introduced numerous generations of CGMs — and the growing number of diabetes cases worldwide, DexCom has had no trouble sustaining a 20% growth rate.
Although DexCom shares come with a premium, this premium is well deserved.
Most people are familiar with Amazon because of its leading online marketplace. A March 2022 report from eMarketer estimates that Amazon will bring in almost 40% of all retail sales in the U.S. this year. That’s more than five times higher than the share of its next-closest competitor and over eight percentage points more than its 14 closest competitors on a combined basis.
While it’s great news that the company’s marketplace is having no trouble attracting shoppers, Amazon’s future is all about its ancillary sales channels. That’s because the operating margins associated with online retail tends to be razor thin.
For example, the lure of Amazon’s marketplace has helped the company sign up more than 200 million Prime members. These are folks paying $139 annually, or $14.99 monthly, for Prime. In return for shipping perks and access to proprietary content, Amazon is netting nearly $35 billion on an annual run-rate basis in high-margin subscription revenue. This cash flow allows the company to reinvest in its rapidly growing logistics network, as well as other high-margin initiatives.
While Alphabet’s Google Cloud holds an estimated 8% of global cloud-service market share, Amazon Web Services (AWS) is anchoring the industry with a whopping 31% share of worldwide cloud-service spending in the second quarter, based on a report from Canalys. Despite accounting for just a sixth of Amazon’s net sales, AWS has consistently generated well over half of Amazon’s operating income. AWS looks to be the company’s ticket to tripling its cash flow over the next four years.
And just like Alphabet, Amazon has never been cheaper as a publicly traded company on the basis of future cash flow projections.