There's no sugarcoating the fact that both new and tenured investors were taken for quite the ride last year. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all fell into a bear market and delivered their worst returns since 2008.
Although it was, at times, difficult to find bright spots, investors did see a few rays of sunshine from companies enacting stock splits in 2022.
A stock split allows a publicly traded company to alter its share price and outstanding share count without having any impact on its market cap or operations. Forward stock splits reduce a company's share price while increasing its outstanding share count by the same factor. Meanwhile, reverse stock splits are intended to increase a company's share price while lowering its outstanding share count by the same magnitude.
Image source: Getty Images.
Investors tend to get most excited about forward stock splits. Companies enacting forward stock splits have often seen their share price rise significantly. More importantly, these are businesses that are typically firing on all cylinders and out-innovating their competition. For retail investors without access to fractional-share purchases through their online brokers, forward stock splits can make high-flying stocks more nominally affordable on a per-share basis.
As we move headlong into February, one stock-split stock stands out for all the right reasons and looks to be historically inexpensive. At the same time, another widely held stock-split stock is rife with red flags, and investors should avoid it like the plague.
The surefire stock-split stock to buy in February: Alphabet
Though there were more than 200 stock splits in 2022, the one that stands out as a surefire value at this very instant is FAANG stock Alphabet (GOOGL 0.35%) (GOOG 0.37%). The parent company of Google, YouTube, and Waymo, among other subsidiaries, completed a 20-for-1 forward split in mid-July. After its shares traded for north of $3,000 at one point last year, a single share of Alphabet could be purchased this past week for less than $100.
Alphabet's foundational operating segment has been and will continue to be internet search engine Google. Over the trailing-four-year period (December 2018 through December 2022), Google has accounted for no less than 91% of global internet search share. Having a practical monopoly on internet search affords Alphabet exceptional ad-pricing power when the U.S. and global economies are expanding.
To add to this point, Alphabet and its investors can use time as an ally. Despite recessions being an inevitable part of the economic cycle, they're often short-lived. By comparison, economic expansions last years. The company's ad-driven search segment is going to spend a disproportionate amount of time benefiting from ad growth during periods of expansion.
While Alphabet's search engine is its cash cow, it's far from the only growth driver. Streaming platform YouTube, which Alphabet acquired in 2006, has grown into the second-most-visited social media site on the planet, with 2.51 billion monthly active users. That's more than enough eyeballs to command attention from advertisers.
Alphabet is currently focused on improving the monetization of YouTube Shorts -- short-form videos that last for less than a minute. According to YouTube, approximately 1.5 billion signed-in users are viewing Shorts each month, with total daily Shorts views topping 30 billion. Introducing ads in Shorts, as well as incorporating Shorts into YouTube TV, provides ways for parent Alphabet to monetize this increasingly popular form of content.
And let's not forget about cloud infrastructure segment Google Cloud, which accounted for 9% of worldwide cloud infrastructure spending during the third quarter, based on estimates from Canalys. Although this is a money-losing segment for the moment, cloud services tend to generate higher margins than advertising. Years from now, it wouldn't be surprising if Google Cloud was the primary cash-flow generator for Alphabet.
Over the past five years, Alphabet has averaged a price-to-cash-flow ratio of almost 19. You'll note I'm referencing cash flow and not earnings, which is because Alphabet tends to reinvest a lot of its cash flow in its business. This makes cash flow an arguably better indicator of value with Alphabet than earnings does.
Based on Wall Street's consensus cash-flow estimate of $12.58/share for the company in 2025, you can buy into Alphabet right now for a multiple of just below 8 times cash flow. That's historically inexpensive for such a dominant, fast-growing company.
The all-electric Model 3 is Tesla's flagship sedan. Image source: Tesla.
The ultra-popular stock-split stock to avoid like the plague in February: Tesla
On the other hand, there's an extremely popular stock-split stock you can steer clear of in February. I'm talking about electric-vehicle (EV) manufacturer Tesla (TSLA -3.55%), which conducted a forward 3-for-1 stock split in late August. It was the company's second stock split in as many years.
Tesla is the largest auto company in the world by market cap, and it achieved this feat by riding its first-mover advantage. Including the ramp-up of production activity at its newer gigafactories in Austin, Texas, and Berlin, Germany, the company anticipates producing approximately 1.8 million EVs in 2023. That would be up considerably from the 1.37 million EVs produced last year.
Additionally, Tesla has wowed investors with its push into the recurring-profit column. The business has delivered a generally accepted accounting principles (GAAP) profit of between $2.26 billion and $3.69 billion over the past five quarters.
And yet there are plenty of reasons to be skeptical of North America's leading EV producer.
To begin with, Tesla's foundation has shown signs of cracking. The company's inventory levels have been climbing, and it has responded with significant price cuts in the U.S. and China. Although these price cuts could lead to a temporary surge in sales, they're terrible news for the company's automotive gross margin.
To build on this point, Tesla isn't immune to the headwinds that affect the auto industry. Just like legacy automakers, it sells an easily commoditized product that's vulnerable to supply chain shortages, rapidly rising input costs, and poor consumer sentiment. If a recession does materialize in the U.S., Tesla is going to struggle mightily.
What's more, Tesla hasn't demonstrated that it's anything more than a car company. Though it installs solar panels and home battery stations and provides services via its Supercharger network, these are low-margin, money-losing operating segments. Tesla's entire existence depends on the success of its EVs.
The problem is that auto stocks typically trade at an earnings multiple of between 6 and 7, which reflects the highly cyclical nature of the industry. Tesla's price-to-earnings ratio in 2023 is estimated at 44.
But the biggest red flag of all might be CEO Elon Musk. Tesla's CEO has drawn the ire of securities regulators on multiple occasions. Worse yet, Musk's innovations and launch dates have frequently failed to materialize. His call for 1 million robotaxis to be on the roads by 2020, along with level 5 full self-driving vehicles in 2014, remains unfulfilled. Additionally, key vehicles, such as the Tesla Semi and Cybertruck, have been delayed by years.
The issue is that virtually all of Musk's promises are baked into Tesla's share price. If he and his company aren't delivering on those promises, the air could quickly leak out of Tesla's tires. Between Musk being a plain-as-day liability and Tesla shares trading at a nosebleed premium, it's an easy stock-split stock to avoid in February.
