Why Amazon and Alphabet are Post-Split Buys

Lately, U.S. technology companies are making their best impressions of U.S. Olympic gymnasts in performing the splits—as in, stock splits.

A stock split refers to when a company deliberately increases its number of shares outstanding in making it more attractive to the market. The share price is decreased by the same multiple, resulting in no change to the company’s market value. 

We most commonly see 2-for-1 stock splits that give shareholders twice as many shares that are each worth half of what they previously were. So with no impact on company or shareholder value, what’s the point?

More often than not, a company decides to enact a stock split to make it more affordable to the masses. Usually, the stock price has become so high that buying even one share is not an option for many retail investors.

In the case of popular mega-cap technology stocks whose prices can climb well into the thousands, a 2-for-1 split doesn’t cut it. Instead, 20-for-1 splits are often required to put a big enough dent in the share price. 

In recent weeks, these two companies did just that—and effectively invited investors to come along for the ride.

Is Amazon Stock a Buy? 

When Amazon.com, Inc. (NASDAQ:AMZN) started trading on June 6th, the opening bid was around $125, reflecting a 20-for-1 split. This was a far cry from when the e-commerce giant traded well above $3,000 per share and was off limits to many investors. Not anymore.

While Amazon appears to be having a 95% off sale on its stock, the reality is that it is the same old Amazon—with a trillion-dollar-plus market value and little in its way of growing to $2 trillion and beyond. 

To get there, though, Amazon will have to work through the hangover it is feeling after posting extraordinary pandemic-driven growth. Slowing sales growth, higher costs, and the Rivian investment write-down have pressured the stock. After recording a surprising net loss in Q1, the company is expected to generate EPS of less than $1.00 this year, following EPS of $3.24 in 2021. 

However, a sharp turnaround is anticipated for 2023. That’s when the Street is projecting that earnings will again approach the $3.00 level after management hits the reset button by focusing on productivity gains and the optimization of its vast retail empire. It is also when we are likely to see the benefits of Covid market share gains that Amazon accumulated when online shopping was the only game in town.

Meanwhile, Amazon’s less talked-about AWS cloud business is expected to keep delivering strong growth. The division generated record revenue last quarter and is the clear profit producer for the company despite all the attention around Prime and e-commerce activity. 

As the clear leader in both online retail and cloud infrastructure, Amazon’s newly ‘discounted’ stock has nowhere to go but up from here. With virtually every analyst on the Street calling it a buy, more Amazon shoppers will soon become Amazon shareholders.

Did Alphabet Split Its Stock?

Last week, Alphabet Inc. (NASDAQ:GOOGL) completed a 20-for-1 split that put its share price back at the $100 level for the first time since 2005 (soon after it made its Nasdaq debut at $50). Much has changed since then, including a departure from the search engine nomenclature and an ascension into the exclusive trillion dollar market cap club—which currently calls only Apple, Microsoft, Amazon, and Alphabet members. 

Alphabet’s split came at a time when the stock had already become 30% cheaper than its 2021 all-time high. Although the company reported 22% operating profit growth in Q1, management offered a tepid outlook for the remainder of the year due to tough year-over-year comparisons and ongoing regulatory headwinds stemming from its dominant search position. Fears of a recession have also brought concerns that digital ad spending could slow, crippling the business that Alphabet remains highly dependent on. 

While these challenges are likely to be around for a while, eventually, the skies should clear, and order will be restored in the online advertising industry. Google will still be the runaway leader in online search and, as a result, Alphabet’s profitability should accelerate. Analysts’ estimates for 2023 EPS imply roughly 20% growth. 

As the search business stabilizes, the market will learn more about Alphabet’s non-search investments. The Google Cloud, machine learning, and data analytics stand to become diversifying growth contributors in the years ahead. 

When Alphabet reports second quarter results after the bell on July 26th, a big move one way or the other is likely given how volatile mega-cap tech stocks have been this summer. Regardless of whether that move is up or down, the reality is that at the current post-split price and valuation (17x FY23 earnings) long-term investors should be searching for some shares.