Apple announced its 4 for 1 stock split and its share price jumped 25%. Tesla stock jumped 45% and surged past the $2000 mark after it announced its 5 for 1 stock split. We will look at 7 potential companies that may be ripe for stock splits.
Are stock splits the new trend among companies and is that a good strategy to invest? What exactly happens during a stock split? Which are the potential 7 companies that may announce stock splits?
Potential companies for announcing Stock splits
- Amazon AMZN
- Alphabet GOOG
- Shopify
- Regeneron Pharmaceuticals REGN
- Netflix
- Adobe
- Domino’s Pizza
Amazon AMZN $3,282
The e-commerce giant has come a long way since it became a public company in 1997 at the height of the dot com bubble. In the past 5 years alone, the stock price has risen from around $500 per share to the current $3,282 for a six fold increase. Behind this rise, the whole retail sector has tumbled and many iconic companies went bankrupt.
Amazon split the stock 3 times and all that happened before the 2000 market crash. One share of IPO would be 12 shares at the end of these 3 splits. After this, the stock never split until today. With no end in sight for the rise of Amazon, this may be a good time a stock split may be announced. That would make it more accessible to retail investors. Come to think of it, if you had to spend up to $3,000 for a single share, which is usually a big chunk of a paycheck for most common people, who would purchase a single share?
Jeff Bezos the CEO of Amazon is a very shrewd manager and an investor. He has published the first annual report where he laid the foundations of his investment philosophy which is tailored mostly on the value investing principles of Ben Graham and Warren Buffet. The philosophy is to ignore market gyrations and focus on producing value for the shareholders. He also promised to stick to a long term perspective for the company.
With such a solid investment philosophy, it would be very counter intuitive if the stock split because that would bring in a swarm of day traders and fly by night investors. On a side note, Warren Buffet did not split his Berkshire Hathaway stock and each share costs more than $300,000 which is more than the median house mortgage. He does that so only long term investors invest in his company.
Alphabet GOOG $1,584
Another company that belongs to the trillion dollar club is Alphabet, the parent company of Google. With a 150% return in the past five years, this was one of the stocks that contributed to the bull run of the stock market.
Google split its stock before but it was so the company’s founders keep most of the voting rights for the Stock.
Many investors are currently speculating over whether Google will stock split again. For one, the current share price makes the stocks inaccessible to certain investors, particularly those who trade part-time or do not have a lot of capital.
Larry Page and Sergey Brin have stated, however, that they aren’t concerned by this and that they prefer their investors to have a long-term interest in Google’s vision rather than those investors and traders seeking to make a quick profit from Google stock.
Since Page and Brin hold a majority of the voting share between them, any future stock split or increase in voting power for shareholders will have to be approved by both of the founders in order for it to pass through the board. If their previous voting record is anything to go on, this seems unlikely at present.
Shopify SHOP $1,021
Starting from a price of $25 and reaching $1000 in the past five years, investors who were part of the journey have seen outstanding returns from SHOPIFY. It had a revenue of $1.5 billion dollars in 2019. With the pandemic closing brick and mortar businesses, it provided the tailwinds for SHOPIFY and it cashed in on this trend by raking in revenue of $715 million dollars in the second quarter of 2020.
Shopify helps businesses by offering software tools to start, grow, and market a retail enterprise of any size. Merchants can use its software to run their business across all sales channels, including web, mobile, social media, and physical marketplaces.
SHOPIFY has a market cap of $220 billion. It still has to report earnings but with non-GAAP standards, it already is profitable. The excitement is about the future. Shopify is often compared to Amazon in its early days, and there are indeed many similarities. Shopify and Amazon are e-commerce leaders. Both are growing revenue at a rapid pace and power enormous amounts of vendor sales. Amazon eventually went on to become a trillion-dollar company, and many people are optimistic that SHOP could do the same.
If it also reaches the trillion dollar club, it’s a 5X from the current price. This usually would make the management think about splitting the stock.
Regeneron Pharmaceuticals REGN $608
Regeneron Pharmaceuticals (NASDAQ: REGN) is probably best known for its tremendously successful eye-disease drug Eylea. It also partnered with Sanofi to market Dupixent, which soared the sales. There are also late stage biotech drugs that are in the pipeline for cholesterol and Ebola antibody therapy.
However the much anticipated drug in the pipeline is the COVID-19 antibody drug.
This is what has driven its share price from $450 to above $600 in the past 3 months. With the coronavirus pandemic, investors are bidding up the shares of potential pharmaceutical and biotech companies to new highs.
Regeneron made the pact with Swiss based company Roche because it doesn’t expect to be able to manufacture enough of the drug on its own to meet global demand. The partnering with the rival could more than triple supplies of the medicine pending regulatory approvals.
Netflix NFLX $493
Netflix is the granddaddy of streaming services. It’s a disruptor company that had the vision for the future of Cable and moving watching and the capability to execute its vision to perfection. CEO Red Hastings said he got the idea of starting after he had to pay late fees to his movie rental return but this claim has not been validated.
When it first opened, Netflix was purely a movie rental service. Users ordered movies on the Netflix website, and received DVDs in the post. When they were finished with them, they would simply post them back to Netflix in the envelopes provided. At the time, this was seen as a boon to those who did not have a video rental store nearby.
Netflix went public in 2002 and it was only in 2007 that it started to transition to the streaming service model. With the App available on Apple devices and Playstation and Nintendo, the company took off. With investments in original content and many academic awards later, Netflix expanded into 190 countries and has a total of 190 million subscribers.
It has a market cap of $213 billion and $20 billion in revenue. With this rate of growth, it will not be surprising if the stock reaches new heights with each earnings release in this heated market.
Adobe ADBE $472
Adobe which is the maker of blockbuster graphic design and creative products like Adobe Photoshop and Acrobat was on a decline with only desktop products to show. The company then executed a transition from desktop based licensed software to the cloud based subscription model. Its offering of Creative Cloud which is a complete suite of products for graphic design, document authoring and video editing. This was just the boost it needed.
Its share price jumped six times from $80 per share to its current $472 per share. Revenue jumped from under $6 billion per year to over $11 billion. Net income doubled from $1.5 billion to over $3 billion.
After Microsoft and Oracle, Adobe is the third valuable business software company. Its market capitalization is around $220 billion. With the market not shying to raise companies to the Trillion dollar valuations, Adobe has a lot of runway left.
Domino’s Pizza DPZ $421
Domino’s stock has grown 210x from $2 to $420 since 2010. They achieved this dominance by really listening to customers and honestly changing their core offering completely.
The kicker is that they pulled it off by thinking like a startup. Let’s take a closer look at how:
Domino’s was a great pizza delivery company with a terrible tasting pizza until 2010.
They used their terrible reviews as motivation to completely reinvent their pizza. The huge pivot coincided with Patrick Doyle joining as CEO in 2010. This was hugely important because he spearheaded the transformation and pushed to create pizza that customers would love. That required radical action. The top chefs at Domino’s began to overhaul the entire recipe by going back to the drawing board and redesigning different elements like the crust, the sauce, and the cheese. Chefs tested over ten types of crusts, fifteen types of sauces, and dozens of cheese. They mixed and matched different combinations to understand what flavors worked best together. In the end, they ended up with a completely new crust, sauce, and cheese recipes. The entire pizza was new.
They took the delivery game to a whole new level by developing Apps with zero click ordering, voice assistant friendly and even moved to the game of self-driving cars. They even experimented with drone delivery of Pizzas. With revenue of $3.6 billion and market cap of $16 billion, there is a lot of room to grow. Especially since they are not just a Pizza company but a whole Pizza delivery disruptor.
So far the stock has not split at all, but since it’s a customer oriented company, they may consider stock split so people can savor their stock as well as they do their pizzas!
Summary
Fundamentally nothing changes for the company. It’s just overenthusiastic investors pushing up the share prices. This should never be your investment strategy. In the long run, the only way a company’s stock price goes up is by the earnings it produces. Instead of putting bets on stock split related stock picking, it would be better to focus on companies that have good business models and produce shareholder value over the long run.