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Motley Fool Issues Rare “All In” Buy Alert
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It’s been a historic year for Wall Street… for all the wrong reasons. We’ve watched the broad-based S&P 500 and growth-focused Nasdaq Composite plunge into a bear market on the heels of historically high inflation, back-to-back quarterly declines in U.S. gross domestic product, and Russia’s invasion of Ukraine, which further compromises the global energy supply chain.
Yet amid this tumultuous year, everyday investors have found a source of positivity from stock-split stocks.
Image source: Getty Images.
A stock split is a mechanism that allows a publicly traded company to alter its share price and outstanding share count without affecting its market cap or operations. A forward stock split can make shares more nominally affordable for everyday investors who don’t have access to fractional-share purchases with their online broker. Meanwhile, reverse stock splits can boost a company’s share price to ensure it remains compliant for listing on one of the major U.S. exchanges.
Most investors get excited about forward stock splits, because a company wouldn’t be conducting a forward split if its share price hadn’t risen significant. And a company’s share price wouldn’t soar if it weren’t out-innovating its competition and executing well.
In 2022, a half-dozen high-profile forward stock splits have been announced and/or taken place:
The common theme propelling interest in these stock-split stocks is that they’re industry leaders, or at worst major players.
Yet among these top-tier stock-split stocks, one stands out as a screaming buy, while another has serious warning flags surrounding it.
Image source: Getty Images.
There’s little question that the top stock-split stock for investors to buy hand over fist right now is Alphabet, the parent company of Google, YouTube, and autonomous driving company Waymo. Although concerns about weaker ad spending could adversely affect Alphabet in the very short-term, this is a company that brings sustained competitive advantages to the table.
Alphabet’s foundation for more than two decades is internet search engine Google. According to data from GlobalStats, Google has accounted for between 91% and 93% of global internet search share for the trailing two-year period. Having a veritable monopoly on search allows Google to command excellent ad-pricing power and generate an incredible amount of cash flow.
But what the investing community should be most excited about is what Alphabet is doing with all the cash it’s generating. For instance, the company is aggressively investing in its rapidly growing cloud infrastructure service, Google Cloud. Though AWS is the current king of cloud services, Google Cloud ended June with an 8% global share of cloud spending. By the midpoint of the decade, this could be a serious cash flow driver for Alphabet.
In addition to Cloud, Alphabet is leaning on streaming platform YouTube, which is attracting 2.48 billion monthly active users. As you can imagine, such robust engagement has helped the company’s ad-pricing power and boosted subscription revenue. In ad revenue alone, YouTube is nearing a $30 billion annual sales run-rate.
Alphabet has even turned to share repurchases as a way to boost shareholder value given its robust cash flow. In April, the company’s board of directors authorized a $70 billion share buyback.
The cherry on the sundae is that Alphabet is cheaper now than it’s ever been as a publicly traded company. Investors can buy shares of Alphabet for just 18 times Wall Street’s consensus forecast earnings in 2023, even with the strong likelihood of persistent double-digit sales growth throughout the decade.
On the other end of the spectrum is a stock-split stock that should be avoided at all costs: EV maker Tesla.
Obviously, Tesla wouldn’t have attained a trillion-dollar valuation if it wasn’t doing something right. Despite semiconductor chip shortages and China’s zero-COVID strategy adversely impacting production at the Shanghai gigafactory, the company is profitable on a recurring basis and on pace to deliver more than 1 million EVs this year.
Optimists also point to CEO Elon Musk as a reason for Tesla’s amazing performance since its initial public offering in 2010. Musk is a visionary that’s brought four EV models into production and helped diversify Tesla into energy storage products and solar panel installation.
However, I believe this perceived upside catalyst to be the biggest risk to Tesla. Over time, Elon Musk has become a legal, financial, and operating risk to his company that can’t be overlooked any longer. From his potentially distracting takeover of Twitter to his questionable tweets that seem to draw the ire of the Securities and Exchange Commission from time to time, Musk has proved to be a significant liability.
What’s arguably even more concerning has been Tesla’s inability to meet or exceed Musk’s forecasts. Though Musk regularly touts the upcoming release of new EVs or innovations, virtually every planned release date gets pushed back — sometimes indefinitely. That’s a big problem when a sizable portion of Tesla’s valuation is based on these new innovations becoming reality.
The other major issue with Tesla is its valuation. Whereas auto stocks are typically valued at a single-digit forward-year price-to-earnings multiple, investors are currently paying 54 times Wall Street’s consensus earnings for the upcoming year to own shares of Tesla.
Not only is Tesla’s business every bit as cyclical as traditional automakers, but the company’s competitive advantages in the EV space are already being chipped away by new and legacy companies. As an example, relatively new entrant, Nio, introduced two EV sedans (the ET7 and ET5) that can handily outpace Tesla’s flagship sedans (Model 3 and Model S) in range with the top available battery pack upgrade.
The luster that made Tesla a game-changer looks to be wearing off.
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. Sean Williams has positions in Alphabet (A shares) and Amazon. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Nio Inc., Palo Alto Networks, Shopify, Tesla, and Twitter. The Motley Fool recommends DexCom and 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.
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