When challenges arise on Wall Street, investors have a tendency to turn to profitable, time-tested companies that have handily outperformed their peers. While the FAANG stocks have been the popular/logical choice for the past decade, it's companies enacting stock splits that have endeared investors over the past two years.
A stock split is an event that allows a publicly traded company to cosmetically alter its share price and share count without having any impact on its market cap or operations. Forward-stock splits reduce a company's share price to make it more nominally affordable for everyday investors, while a reverse-stock split is employed to increase a company's share price to ensure it remains compliant with listing rules at major exchanges.
Without question, most of Wall Street gravitates to companies enacting forward-stock splits. That's because companies enacting forward splits are very clearly outperforming and out-innovating their competition.
Since the start of July 2021, nine well-known, high-flying stocks have conducted forward-stock splits:
- Nvidia (NVDA -2.68%): 4-for-1 split
- Amazon (AMZN -1.49%): 20-for-1 split
- DexCom (DXCM 1.39%): 4-for-1 split
- Shopify (SHOP -1.81%): 10-for-1 split
- Alphabet (GOOGL -1.96%) (GOOG -2.02%): 20-for-1 split
- Tesla (TSLA -1.36%): 3-for-1 split
- Palo Alto Networks (PANW -3.23%): 3-for-1 split
- Monster Beverage (MNST -0.09%): 2-for-1 split
- Novo Nordisk (NVO 0.52%): 2-for-1 split
But not even stock-split stocks are created equally. Based on the latest round of Form 13F filings, there are clear winners. More specifically, billionaire money managers are scooping up shares of very specific members of this stock-split group.
What follows are three stock-split stocks billionaires bought hand over fist during the September-ended quarter.
Alphabet (Class A shares, GOOGL)
The first stock-split stock billionaire investors can't seem to get enough of is Alphabet (specifically, the Class A shares, GOOGL). Alphabet is the parent company of familiar internet search engine Google, streaming platform YouTube, and autonomous vehicle company Waymo, among others. All told, nine billionaires were busy mashing the buy button during the third quarter, including (total shares purchased in parenthesis):
- Stephen Mandel of Lone Pine Capital (3,113,001 shares)
- Bill Ackman of Pershing Square Capital Management (2,169,824 shares)
- Chase Coleman of Tiger Global Management (1,523,000 shares)
- Ken Griffin of Citadel Advisors (1,498,213 shares)
- John Overdeck and David Siegel of Two Sigma Investments (1,195,541 shares)
- Ken Fisher of Fisher Asset Management (1,023,535 shares)
- Israel Englander of Millennium Management (602,822 shares)
- Steven Cohen of Point72 Asset Management (544,495 shares)
The likeliest reason these billionaire money managers have piled into Alphabet is the overreaction investors have had to the potential for economic weakness. Since Alphabet generates nearly 78% of its revenue from advertising, and U.S. gross domestic product grew by a healthy 4.9% during the third quarter, it would appear fears of a meaningful ad slowdown have proved incorrect.
Billionaires likely also value Alphabet's foundational operating segment, Google. In October, Google claimed close to 92% of worldwide internet search share. Moreover, it hasn't accounted for less than a 90% share of monthly internet search over the past 8.5 years. It's the undisputed best way for advertisers to target users, and that's going to afford Google exceptional pricing power for a long time to come.
But the most-exciting growth catalyst for Alphabet is its cloud segment. Google Cloud is the global No. 3 in cloud infrastructure service spending, and enterprise cloud spending is still, arguably, in its infancy. After years of operating losses, Google Cloud is now generating a profit. Though Wall Street wasn't thrilled with Google Cloud growing by "only" 22.5% year-over-year in the September-ended quarter, it's hard to argue against a decisive shift to recurring profitability from a potentially high-margin segment.
A second stock-split stock that billionaires bought hand over fist during the third quarter is e-commerce behemoth Amazon. A grand total of 10 billionaires added to their respective funds' existing stakes, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (5,042,696 shares)
- Ole Andreas Halvorsen of Viking Global Investors (4,348,680 shares)
- Steven Cohen of Point72 Asset Management (1,171,081 shares)
- John Overdeck and David Siegel of Two Sigma Investments (883,205 shares)
- Ken Fisher of Fisher Asset Management (665,738 shares)
- David Tepper of Appaloosa Management (587,500 shares)
- Dan Loeb of Third Point (580,000 shares)
- Stephen Mandel of Lone Pine Capital (569,245 shares)
- Chase Coleman of Tiger Global Management (239,760 shares)
Not to sound like a broken record, but the optimism with Amazon probably has a lot to do with the resilience of the U.S. economy. Amazon generates an outsized percentage of its revenue from its world-leading online marketplace. When economic downturns occur, it's not uncommon for consumers to spend less, thereby stalling a significant portion of Amazon's top-line growth. A healthy U.S. economy reduces near-term concerns about a retail sales slowdown.
However, the smartest investors on Wall Street are aware that Amazon is far more than an online retailer. Whereas Google Cloud is the world's No. 3 cloud infrastructure service, Amazon Web Services (AWS) is No. 1, with approximately 30% of global market share. AWS is pacing more than $92 billion in annual run-rate revenue, as of the end of September, and its exceptionally high margins (relative to online retail sales) mean this segment accounts for the lion's share of Amazon's operating income.
Amazon's subscription services are also extremely important to its long-term success. In April 2021, the company surpassed 200 million global Prime subscribers, according to then-CEO Jeff Bezos. With exclusivity to Thursday Night Football and an ever-growing online marketplace and logistics network, it's a fair assumption that this subscriber count, along with Amazon's subscription pricing power, have both increased since April 2021.
Although Amazon isn't cheap based on the traditional price-to-earnings (P/E) ratio, it's historically inexpensive relative to its cash flow potential over the coming years.
The third stock-split stock that billionaires are buying hand over fist is the most-owned stock among retail investors. I'm talking about electric-vehicle (EV) maker Tesla, which was purchased by four prominent billionaires during the third quarter, including (total shares purchased in parenthesis):
- John Overdeck and David Siegel of Two Sigma Investments (644,638 shares)
- Jeff Yass of Susquehanna International (603,898 shares)
- Israel Englander of Millennium Management (407,695 shares)
Billionaires have long latched onto Tesla stock because it's in the driver's seat (sorry, the most obvious pun had to be used) in the EV space. It's North America's leading EV manufacturer; the only automaker to build itself from the ground-up to mass production in more than a half-century; and the only pure-play EV company that's generating a recurring profit. These billionaires continue to view Tesla as a disruptive force in the automotive space.
But while Amazon and Alphabet are historically cheap, at least relative to their cash flow, Tesla is on the opposite end of the spectrum. Despite its struggles to meaningfully expand beyond selling and leasing EVs, it's trading at a nosebleed valuation in relation to other auto stocks. This is a potential problem given the headwinds the company is encountering.
Specifically, Tesla kicked off a price war with other EV makers earlier this year. Though optimists had hoped Tesla selling its EVs for a lower price was a sign of its improved production efficiency, CEO Elon Musk stamped out this belief during his company's annual shareholder meeting by noting that Tesla's pricing strategy is dictated by demand. The more than half-dozen price cuts across Tesla's production models in 2023, which have more than halved the company's operating margin over the trailing year (as of Sept. 30, 2023), are due to rising inventory and/or weaker demand.
These billionaires might may also be playing with fire given Musk's history of failing to deliver. Despite overseeing the rollout of four current production models -- soon to be five with the Cybertruck -- Tesla's chief has a habit of overpromising and underdelivering. If many of Musk's unfulfilled promises are backed out of Tesla's valuation, its stock could head meaningfully lower.