Stock Splits Can Attract New Retail Buyers and Ignite Rallies
A company’s board of directors decides to pursue a stock split for a number of different reasons, including boosting a stock’s liquidity and attracting new buyers. While it’s important for investors to note that a company’s market capitalization and intrinsic value won’t change at all following the split, the truth is that these strategic moves can be huge positive catalysts for the share price. Just look at some of the recent split announcements which ignited massive rallies including NVIDIA (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) for a reminder of how powerful this news can be.
In 2022, we've received stock split announcements from some of the biggest tech companies in the world, Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL). While the news has been met with underwhelming reactions thus far, that doesn’t mean you should write these stocks off. Keep in mind that it’s been a difficult market environment for any stock to rally in, but if the indices can finally find a bottom we could be in for a huge move into the split dates for these iconic companies.
Let's take a further look at why these companies are so intriguing following their stock split announcements.
1. Amazon
Amazon shareholders have had to be very patient over the last year, as shares are essentially flat over that timeframe and have been underperforming in a big way while other mega-caps soared higher. A lot of this likely has to do with just how expensive this stock has gotten on a dollar basis, which has led to low liquidity and made it difficult for retail investors to justify adding shares. The bottom line is that the stock desperately needed a split to get going again, which is why the recent 20-for-1 split announcement is so interesting.
While the split news is certainly big, there are plenty of other reasons to be bullish about Amazon’s long-term prospects. It’s the leading U.S. eCommerce retailer, the leading provider of cloud-based infrastructure services with Amazon Web Services, and a company with a rapidly growing advertising business. These are some of the strongest trends in the technology sector, and the fact that investors get exposure to all of them with one company is truly remarkable.
Additionally, Amazon recently boosted its prices for its popular Amazon Prime membership subscription by 17%, which should help to offset some of the near-term pressures from inflation and supply-chain issues. In addition to the stock split, Amazon also announced a $10 billion share repurchase program, which is yet another strong selling point for investors to consider here. After the split, Amazon could be included in the Dow Jones Industrial Average, which would top off a potentially monumental year for this fantastic company. Investors should strongly consider adding shares prior to the split, which will provide additional shares to shareholders of record at the close of business on May 27th.
Alphabet
Another mega-cap name to consider adding ahead of its stock split is Alphabet. The search engine powerhouse announced a 20-for-1 split that will impact stockholders of record at the close of business on July 1st. Even without the split news, Alphabet is an attractive tech giant that belongs in almost any portfolio. It’s the world’s leading internet search provider and the largest generator of internet advertising revenue, with a dominant market position that should continue delivering earnings growth for many years to come.
When you stop to consider how quickly marketers and advertisers are shifting their spending towards online advertising versus traditional methods, it’s easy to recognize just why Alphabet is so appealing. Google Ads offers so many benefits, including the ability to target ads based on keywords, location, age, language, devices, and more. Advertisers can also easily measure how successful their Google Ads campaigns are and take advantage of the search engines truly massive reach. For perspective, Google handles over 1 trillion searches per year.
There’s also plenty to like about Alphabet’s Google Cloud business segment, which is quickly gaining market share from competitors and posted 44% year-over-year revenue growth in 2021. YouTube is another strong positive to consider, as the video streaming platform has strong user engagement and is another attractive advertising channel for marketers to utilize. Alphabet consistently delivers impressive earnings growth quarter after quarter, including 38% EPS growth in Q4 on revenues of $75 billion. The only downside to note here is that Alphabet could face continued scrutiny from regulators, but any antitrust cases will likely take a long time to resolve and could be challenging for prosecutors to prove in court.