Stock splits occur when a company multiples its share count to reduce its stock price without changing its market cap (the total value of all shares outstanding). While this process doesn’t change a company’s valuation, it can make the stock more appealing to retail investors who are intimidated by higher-priced stocks and/or may not have access to fractional equities.
For those investors who don’t want to base their investment thesis solely on the fact that a stock-split stock’s price is now more reasonable, there are plenty of other reasons why two recently split stocks, Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), could make great buys right now. Let’s take a closer look.
On June 6, Amazon completed a 20-to-1 stock split that dropped its stock price to around $122 per share. With a market cap of $1.25 trillion, it is still one of the biggest companies in the world. But a massive international push and a renewed focus on on-demand streaming could unlock even more long-term value for investors.
Amazon owes much of its success to its ability to pivot to new growth drivers. First, it was an online book store, then an e-commerce giant, and now a diversified tech conglomerate. But the company has a few more tricks up its sleeve.
According to Insider Magazine, Amazon is planning a big international push next year that will give its e-commerce platform a larger presence in Latin America and Africa. International e-commerce represented just 26% of Amazon’s first-quarter sales ($126 billion), and the company likely sees this as a long-term growth opportunity. But its expansion of Prime video may be even more exciting.
The Wall Street Journal reports Amazon is planning to roll out its video streaming service into 200 additional countries — a move that will better position it to compete with the market leader, Netflix, which currently operates in 190.
The global streaming push would follow Amazon’s $8.5 billion acquisition of MGM Studios, giving it a larger library of exclusive content and the talent to create more original productions. Are we witnessing Amazon’s video service transform from a loss leader into a stand-alone growth engine? It’s too early to tell. But the future looks bright considering Amazon’s track record of successfully expanding into new opportunities.
This FAANG stock also opted for a 20-for-1 split, which brought Google’s parent company, Alphabet, down to just $108 per share after the split was finalized on July 15. And like Amazon, it is still a massive company (with a market cap of $1.42 trillion). But despite its size, Alphabet still looks like a good deal because of its strong economic moat and relatively low valuation.
The term “economic moat” describes a company’s ability to maintain an advantage over rivals. And with the two most-visited websites on the internet (Google and YouTube), Alphabet has this in droves. The businesses maintain dominance through scale, which gives them brand recognition and more data to work with when developing algorithms to improve user experience and match ads to interested consumers.
First-quarter revenue jumped 23% to $68 billion, driven by strength in Google advertising, which represents 80% of Alphabet’s sales. Cloud computing provides a small but fast-growing diversification — jumping 44% to $5.8 billion in the period.
Like many tech companies, Alphabet is experiencing a post-pandemic slowdown, which sent profits down 8.4% to $16.4 billion. But with a forward price-to-earnings (P/E) multiple of just 19, Alphabet is cheaper than the tech-heavy Nasdaq-100‘s average of roughly 26. This looks like a good value considering the company’s industry leadership, continued top-line growth, and potential to bounce back when macroeconomic conditions improve.
Betting on a tech rebound
The Nasdaq Composite index is down 24% year to date. And much of this decline is driven by big tech names like Alphabet and Amazon as the pandemic boost fades. But it can pay to be greedy when others are fearful. Both companies offer reasonable valuations and compelling drivers for long-term success. Now might be a good time for investors to bet on these stocks trading at a discount to their historic highs.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.