Better Fractional Inventory to Buy Right Now: Amazon, Alphabet, Tesla, or Shopify?
Oall Street and investors have been hit by a flurry of news events in 2022, including historically high inflation and Russia’s invasion of Ukraine. Yet, amid this market volatility, the investment community has become obsessed with companies announcing and enacting stock splits.
A stock split is a way for a publicly traded company to change its stock price and the number of shares outstanding without affecting its market capitalization or operational performance. A forward stock split can be particularly useful for retail investors who do not have access to fractional stock investing. Performing a split can reduce the nominal dollar cost to buy a single stock.
Generally, stock splits are viewed as a positive event within the investment community. Think of it this way: a company’s stock price wouldn’t be high enough to command a spin-off if the company in question was underperforming and innovating more than its competitors.
Since February, pivot of e-commerce Amazon (NASDAQ: AMZN)internet search giant Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG)electric vehicle (EV) manufacturer You’re here (NASDAQ: TSLA)and cloud-based e-commerce platform Shopify (NYSE: SHOP) all announced stock splits. The question is, which of these split stocks is the best buy right now?
Should I load on Amazon?
The first is Amazon, which announced a 20-for-1 stock split in March and executed that split on June 6, 2022.
If there’s a knock against Amazon, it’s the growing likelihood of a US recession. The bulk of Amazon’s revenue comes from its online marketplace. If retail sales were to reverse, Amazon’s high price-to-cash-flow ratio would stick out like a sore thumb in a declining market.
There’s a lot to like here, whether we’re focusing on Amazon’s core retail segment or its ancillary operations. For example, a March 2022 report from eMarketer estimates that Amazon will account for nearly 40% of all online spending in the United States this year. Even as a low-margin operating segment, this online retail dominance has helped Amazon enroll more than 200 million Prime subscribers globally. The fees Amazon collects from its Prime members help fuel investment in its logistics network and allow the company to lower prices from brick-and-mortar retailers.
Amazon Web Services (AWS) is even more exciting than its main online marketplace. According to data from Canalys, AWS accounted for a third of global cloud infrastructure spending in the first quarter. While the growth of cloud services is still in its infancy, AWS seems to be Amazon’s golden ticket to the future.
Could your search end with Alphabet?
The next stock is Alphabet, the parent company of internet search engine Google and streaming platform YouTube. Alphabet announced plans to proceed with a 20-to-1 spinoff in February and will materialize those plans starting tomorrow, July 15, when its stock split will officially go into effect.
Like Amazon, the biggest worry with Alphabet is that a short-term recession could derail its core business. Given that a majority of Alphabet’s revenue comes from advertising and advertising revenue is one of the first things to be hit during a recession, it remains a very real concern that a weakening US economy and / or global could drive down shares of this megacap stock. (split action or not).
But also like Amazon, Alphabet brings its fair share of competitive advantages to the table. For example, data from GlobalStats shows that Google controlled no less than 91% of the global internet search share over the 24 month period. Having a convenient monopoly on Internet search makes it easy for Alphabet, Google’s parent, to command the best price for ad placement.
But it’s a business that goes far beyond simple internet research these days. YouTube has become the second most visited social site on the planet, while Google Cloud has become the world’s third largest provider of cloud infrastructure services. There’s a good chance that Google Cloud will become Alphabet’s primary operating cash flow driver by the middle of the decade.
Should you step on the accelerator with Tesla?
Electric vehicle maker Tesla is the third company to benefit from the stock split euphoria. Having already split its stock 5-for-1 in August 2020, Tesla is seeking shareholder approval to split its stock 3-for-1 at its next annual meeting on August 4, 2022.
If there’s a red flag with Tesla, it might just be the company’s innovative CEO, Elon Musk. Although Musk is a visionary, he has proven to be a liability for the company on more than one occasion. He often over-promises and under-delivers new technology, and more recently has been busy thinking about getting (or not getting) a social media site. Twitter. Without Musk fully involved in Tesla’s operations, it’s not hard to see competitors catching up from a production and performance perspective.
Then again, Tesla did something no other automaker has done in over five decades: build from scratch to mass production. Tesla appears to be on track to surpass one million vehicles produced this year, even with shortages of semiconductor chips and supply chains that remain strained by the COVID-19 pandemic.
Tesla’s competitive advantages may also be difficult to reverse through continued innovation. So far, few electric vehicle makers have rivaled Tesla in terms of power, range or battery capacity.
Is Shopify worth adding to your cart?
The fourth ultra-popular split stock is the cloud-based e-commerce platform Shopify. The company announced its intention to conduct a 10-for-1 stock split in April and began trading at its post-split price on June 29, 2022.
It doesn’t sound like a broken record, but Shopify’s biggest concern is similar to that of Amazon and Alphabet: the growing threat of a recession. Shopify relies on the growth of small businesses to dramatically increase subscription demand and payment volume on its platform. If economic activity weakens, this would expose Shopify’s high valuation multiples.
The good news for Shopify is that it has an exceptionally long track to grow its operations. According to a 2021 company presentation, Shopify is sitting on a $153 billion addressable market from small businesses alone. That’s not even taking into account the company’s many big business wins in recent quarters.
Reinvesting in Shopify’s ecosystem can also pay huge dividends. Last year, Shopify launched its own buy now, pay later (BNPL) service, known as Shop Pay. A BNPL service gives its merchants greater financial flexibility and allows Shopify to gobble up a sizable percentage of the BNPL’s U.S. market share.
And the best fractional stock to buy right now is…
Now that you’ve taken a closer look at four very popular split stocks, we can get back to the question at hand. Among Amazon, Alphabet, Tesla and Shopify, which fractional stock is better to buy right now?
In my opinion, two of these four names can be eliminated out of hand. First, we can get rid of Tesla because of the hijacking created by Elon Musk, as well as the company’s high profit premium. Most automakers tend to trade at single-digit price-to-earnings ratios. With traditional automakers spending billions on electric vehicles and autonomous research, it seems unlikely that Tesla will retain its competitive advantages any longer.
I think we can eliminate Shopify as well. While I think Shopify has a bright, very long-term future, retail-focused businesses may struggle until the country’s central bank completes its rate hike cycle. It’s also not entirely clear how BNPL’s services will fare during a period of economic weakness. Even with Shopify more than 80% below its all-time high, it’s still quite expensive at nearly 135 times Wall Street’s projected earnings for 2023.
This effectively brings it back to Amazon vs. Alphabet – and we’ve been here before. While I think both companies should outperform the broader market over the long term, Alphabet stands out as the smarter stock to buy.
Even if Alphabet’s advertising business suffers in the near term, the company’s historically inexpensive valuation (just 17 times Wall Street consensus earnings for the year ahead) provides a healthy downside buffer than these other split shares do not offer. In fact, Alphabet becomes even cheaper if you withdraw its $134 billion in cash, cash equivalents and marketable securities.
If you’re looking for safety and upside in split stocks, Alphabet is where you’ll find it.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Sean Williams has positions in Alphabet (A shares) and Amazon. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Shopify, Tesla and Twitter. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.