A company that does a stock split usually does it to lower its high share price so that it is more attractive to smaller investors. So what do most stock splitters have in common? They have created so much value in the long run that their stock prices have risen to hundreds or even thousands of dollars.
2022 was an important year for stock splits. Some of the biggest tech giants in the US have chosen to run them, and it raises an interesting question: Can they perform just as well in the future, ultimately requiring another stock split? That would indicate big gains for investors in the long run. A panel of Motley Fool contributors have identified Google parent Alphabet (GOOGL -1.72%) (GOOG -1.69%), Shopify (STORE -3.71%)and Tesla (TSLA -2.51%) as the top three candidates.
This is why investors want to buy and hold them forever.
Leading from the front
Anthony Di Pizio (alphabet): Historically, technology companies have struggled to maintain their relevance; the industry moves fast and new competition is always around the corner (remember Myspace?). But today’s tech giants are relentless innovators; they adapt quickly to change and spend aggressively refining their lead to stay one step ahead of disruptors.
Alphabet’s YouTube platform is a prime example of this, and it’s one reason why investors should own Alphabet stock for the extremely long term. The social media industry is currently dominated by ByteDance’s TikTok video platform, which has become the fastest growing mobile app in history. YouTube quickly adapted to this threat by introducing the concept of ‘Shorts’. Two years later, Shorts is attracting 1.5 billion monthly users, making it neck and neck with its new rival.
But Alphabet has a history of similar successes. After all, the Google search engine has a 91% global market share and it doesn’t come without a dedication to endless improvement. The brand is basically competing with itself in the search industry. Likewise, Google Cloud is currently outgrowing its competitors: One figure doesn’t make a trend, but in the quarter ended June 30, revenue grew 35%, outpacing its two main competitors. Amazon Web services (33%) and Microsoft Azure (20%). Google Cloud is much smaller than both by sales, but beating them for growth is key to catching up in the long run.
Financially, Alphabet is a powerhouse, thanks to the operational diversity described above. The company has generated $278 billion in revenue over the past four quarters and is highly profitable with earnings per share of $5.37 over the same period. It means Alphabet stock is currently about 24% cheaper than the broader technology market based on its price-to-earnings ratio of 20.3, compared to 26.7 for the Nasdaq-100 table of contents. Now might be a good time to strike with a long-term hold, especially for smaller investors, as Alphabet’s recent 20-for-1 stock split has made it much more affordable.
Don’t forget this e-commerce treasure
Jamie Louko (Shopify): Shopify ran a 10 for 1 stock split in late June, but the company didn’t see the short-term increase in its stock price like most companies that have recently split their shares. While a stock split doesn’t fundamentally change the company — it only makes stocks cheaper by turning one stock into 10 — investors have been excited about stock splits this year. Shopify seemed to stay out of that, but here’s why this inventory shouldn’t be forgotten.
Part of the reason stocks didn’t see that boost after Shopify split its shares is that stocks have fallen in recent months. Year to date, Shopify stock is down more than 77% as it struggled with a looming recession and rising inflation. These challenging macroeconomic factors affect Shopify as consumers are less willing to buy discretionary ecommerce items in times of uncertainty. The company enables millions of ecommerce businesses to sell online, so less activity for its merchants results in less revenue for Shopify.
That said, Shopify certainly has the potential to win in the long run. The solutions have been steadily adopted. Even in this difficult environment, Shopify saw gross e-commerce and point-of-sale trade volume growth in the second quarter of 2022 that outpaced the broader industry in the US, indicating that it is gaining market share.
Shopify also has an important advantage: the switching costs. Shopify is not only a leading platform for ecommerce businesses, but also offers hardware products to support in-store sales. Plus, Shopify merchants have access to a payment processing system, short-term capital loans, and even a logistics network that provides fast, reliable delivery for both Shopify’s merchants and their customers. Therefore, it can be difficult to switch to another platform once a merchant gets into the Shopify ecosystem and starts adding more products. This allows it to maintain its customer base during the recession, while rivals could lose customers and thus market share.
With stocks knocking down, the company is now trading at eight times its revenue. While that is more expensive than rivals like BigCommerce Holdings — which is currently trading at 4.6 times sales — this is the cheapest valuation Shopify has seen in a while and is much more reasonable than previous valuations. So maybe now is the time to add stock from this ecommerce leader to your portfolio for the long term.
The highest operating margin in the automotive industry
Trevor Jennewine (Tesla): Not long ago, Tesla was so insignificant that other automakers didn’t see it as a threat. In fact, a former Daimler chairman once said that Tesla was a joke compared to Germany’s major car companies. That was in 2015. It’s funny how quickly things can change.
In the first half of 2022, Tesla led the industry with 19% market share in battery electric vehicle sales, 8 percentage points ahead of the Chinese automaker BYD, the next closest competitor. In fact, despite supply chain problems and lockdowns in China, Tesla has released solid financial statistics over the past year. Revenue grew 60% to $67.2 billion, free cash flow grew 165% to $6.9 billion and the company achieved an industry-leading operating margin of 16.2%.
That is so important that it must be repeated. Tesla – a company once considered a joke – now has the highest operating margin in the auto industry. That success stems from its persistent focus on production efficiency, a quality that CEO Elon Musk says will be Tesla’s biggest competitive advantage in the long run. But investors have other reasons to be optimistic.
Tesla is constantly collecting data from its autopilot fleet. To that end, he has more autonomous driving data than any other automaker, and that gives him a leg up in the race to build a self-driving car. Tesla has planned a robotic axle for volume production in 2024, and the company plans to launch an autonomous ride-hailing service at some point in the future.
That could be a game changer. Musk believes fully self-driving software will eventually be Tesla’s primary source of profitability, and many analysts have backed that sentiment with lofty forecasts. For example, UBS Evidence Lab says the robotaxi market will be worth at least $2 trillion by 2030, and Ark Invest says autonomous ride-hailing services could make $2 trillion by 2030. gain per year by 2030.
In a sense, Tesla is currently a hardware-focused company that could become a software-focused company in the future, and software-focused companies tend to have much higher margins. That means Tesla could become even more profitable in the coming years. Therefore, this stock-split stock is worth buying.