Stock splits have been all the rage in recent years, fueled by surging stock prices of some of the world’s most recognizable companies. However, in recent months, some of those same stocks have suffered spectacular declines as the S&P 500 and the Nasdaq Composite have both fallen headlong into a correction. Worse still, the tech-heavy Nasdaq has tumbled into bear market territory, down roughly 27% from its high reached late last year.

While many companies have decided to split their shares, not all are created equal. Some have been relegated to the bargain bin, while still others belong in the trash bin.

With that as a backdrop, we asked three Motley Fool contributors to identify a stock-split stock they’re most excited about, given the recent market correction and the growth potential of the respective companies. Read on to find out why they picked Amazon (AMZN 4.03%), Alphabet (GOOGL 1.88%) (GOOG 2.32%), and Shopify (SHOP 5.47%) from among the recent stock-split candidates.

Image source: Getty Images.

Amazon: A trifecta of best-in-class businesses

Danny Vena (Amazon): There’s no denying that Amazon’s e-commerce business is the driving force behind the company’s instant name recognition — and with good reason. While estimates vary, the company is expected to account for as much as 40% of U.S. online retail sales in 2022, according to eMarketer. Furthermore, the company is the worldwide e-commerce leader, controlling nearly 8% of the market.

In spite of that sheer dominance, online retail is just the start of Amazon’s large and growing opportunity. The company popularized cloud computing for the masses and remains steadfastly entrenched as the leader, with roughly 33% of the worldwide market share. In the first quarter, revenue for Amazon Web Services (AWS) — the company’s cloud computing segment — grew 37% year over year, helping it maintain its dominant position.

Completing its trifecta of world-class businesses is digital advertising. The electronic real estate on Amazon’s e-commerce platform has provided the foundation for the company’s fast-growing digital ad business. In 2021, the segment generated more than $31 billion in revenue, nabbing third place in the global digital ad market, behind Google and Meta Platforms (FB 4.24%).

Beyond the “big three” businesses, there are still other areas that could propel Amazon’s growth in the future. Amazon Prime, its customer loyalty program, has an estimated 200 million paying members, and Prime Video is frequently cited among the top streaming video services. While voice-controlled smart speakers like the Echo and its digital assistant Alexa are nothing more than a novelty today, other use cases could be right around the corner.

There’s more. While it hasn’t yet reached escape velocity, Amazon’s Just Walk Out technology is gaining steam. The artificial intelligence (AI) platform uses cameras, sensors, and sophisticated algorithms to track shopper purchases as they make their way through the grocery store, allowing them to “just walk out,” generating a digital register tape and charging their account — without ever having to wait in line for a cashier. Amazon has rolled out this technology to 42 of its stores worldwide and is licensing the technology to other grocers. Sainsbury’s — the second-largest supermarket chain in the United Kingdom — has retrofitted its Holborn Circus location with Amazon’s tech, which could be the first of many.

These businesses and others drove robust results for Amazon last year, with net sales that climbed 22% to $470 billion while pushing net income of $33.4 billion up 57%.

It’s worth noting that since the company announced its 20-for-1 stock split earlier this year, Amazon’s stock has fallen on hard times, as fears of slowing e-commerce adoption and the bear market have weighed on tech stocks. History suggests these factors should be short-lived, giving savvy investors the chance to pick up shares of this world-class stock-split stock for cheap.

Image source: Getty Images.

Alphabet: The company that mastered the ABCs of innovation and cash flow

Will Healy (Alphabet): Alphabet revealed its intention to split its stock when it released its 2021 earnings in early April. The Google parent plans a 20-for-1 stock split that will take effect upon the market’s close on July 15. At the price of around $2,120 per share as of the time of this writing, this would take the post-split share price to approximately $106 per share.

But what drove that share price so high that it needed to split was years of massive growth. Its dominance drove users to its search engine and YouTube video platform and produced a huge, fast-growing ad business. As a result, it derived about 80% of its revenue from ads in the first quarter of 2022.

Still, since competition from the likes of Meta and Amazon will probably slow that growth over time, it innovated in numerous other areas. This effort at creation has brought Alphabet into numerous businesses. Life sciences company Verily, driving technology company Waymo, and AI researcher DeepMind are among its holdings. And even if it cannot monetize all of these businesses, shareholders may benefit from future spinoffs.

However, judging by its quarterly reports, one enterprise it continues to monetize successfully is its cloud infrastructure business, Google Cloud. Despite lagging Amazon’s AWS and Microsoft‘s Azure, Google Cloud grew Q1 revenue 43% year over year to $5.8 billion. That exceeded company performance, which saw 23% revenue growth to $68 billion for Q1.

Image source: Synergy Research Group.

Nonetheless, investors hammered the stock when quarterly net income fell 8% during the period to $16.4 billion, a reduction driven by losses on equity securities. Alphabet stock has lost about 10% of its value year over year and has dropped 30% from its 52-week high.

Still, that takes its price-to-earnings (P/E) ratio to about 19, valuing Alphabet well below Microsoft at 27 times earnings and cloud peer Amazon with a 52 P/E ratio.

Additionally, the company generated $15.3 billion in free cash flow during the quarter, helping take its liquidity to about $140 billion. Such a cash hoard gives Alphabet one of the strongest balance sheets in the industry. It should also help enrich investors for the long haul as it splits its stock and monetizes more of its innovations.

Image source: Getty Images.

Shopify: Aligning with its customers to grow

Brian Withers (Shopify): The market flocked to e-commerce stocks as the coronavirus raged around the world. But now, as the coronavirus is winding down, the market has fled these same stocks and left them for dead. Shopify, the platform that powers e-commerce sites for businesses and entrepreneurs, hasn’t escaped this sell-off. With the stock approaching levels from three years ago and its upcoming 10-for-1 stock split, it’s worth taking another look at this behind-the-scenes operator.

Over the past three years, Shopify’s top line has almost tripled. That’s absolutely mind-blowing, but there’s another interesting trend going on that’s even more telling for the future. Shopify reports its revenue in two segments: subscription solutions and merchant solutions. The subscription segment represents the revenue collected from the monthly subscription plans to get access to the platform. Like any subscription business, the company collects money from its customers whether or not they use the platform.

The merchant solutions segment, on the other hand, is driven by customer usage. As Shopify’s merchants make sales on the platform, they collect payments, use fulfillment services, or utilize Shopify shipping. The costs for these transaction-based services are shown in the merchant solutions segment. So when merchants are successful on the platform with more sales, Shopify benefits along with its customers.

Metrics

2019

2020

2021

Revenue

$1,578 million

$2,929 million

$4,612 million

YOY change

47%

86%

57%

Merchant solutions revenue

$936 million

$2,021 million

$3,270 million

YOY change

54%

116%

62%

Merchant solutions % of total

59%

69%

71%

Source: Company earnings releases. Calculations by author. YOY = year over year.

You’ll note from the table above that the merchant solutions segment is growing faster than the overall business and becoming a larger portion of the overall. This is a very positive sign for Shopify, its merchants, and investors. This means that Shopify’s customers, the merchants selling goods on the platform, are growing faster than Shopify’s core subscription business. This bodes well for the long term.

Let’s take a look at another aspect of Shopify’s platform: its shopper metrics. You can see from the table below that customers using Shopify’s platform to buy goods online are spending more every year. This conveys that consumers love spending on Shopify’s merchant’s online stores.

Metrics

2019

2020

2021

Gross Merchandise Value

$61.1 billion

$119.6 billion

$175.4 billion

Shoppers

300 million

457 million

597 million

GMV per shopper

$204

$262

$294

Source: Company presentation. Calculations by author.

Even as e-commerce growth slows down, Shopify and its merchants have found a winning formula that is attracting customers. Even better, those customers spend more over time. As a shareholder, I love that a majority of Shopify’s revenue is aligned with the success of its customers. You might consider adding shares to your portfolio too. Whether you pick up some shares before the stock split on June 22 or after, it’s likely that in five years’ time, you will be very happy you own this e-commerce gem.

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