We’ll remember last year as one of stock market declines. But we also should remember it for something positive — and that’s stock splits.
Many top companies completed these operations after their shares soared in value in recent years. A stock split doesn’t change a company’s market capitalization — but it reduces the value of each share. And this makes it more accessible to a broader range of investors.
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Last-year’s stock-split players didn’t post the increases we may have hoped for after their operations. But here’s the good news: Opportunities to gain are far from over. In fact, the next bull market could seriously boost two stock-split players that have each dropped about 40% over the past year. I’m talking about e-commerce leader Amazon (NASDAQ: AMZN) and electric-vehicle (EV) giant Tesla (NASDAQ: TSLA). Let’s find out more.
Amazon’s recent problems
Rising inflation has hurt Amazon in two ways. It’s made its operations more expensive — everything from running a warehouse to delivering packages. And it also hurt consumers’ wallets, leaving them with less money to spend.
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Amazon also has struggled with the management of its own rapid growth. A doubling of its fulfillment network left the company with excess capacity.
The company has taken steps to manage these problems. It’s announced plans to cut jobs, has worked to improve efficiency, and has shifted investments to favor its highest growth area — its Amazon Web Services (AWS) cloud computing business.
Meanwhile, sales continue to rise. Though AWS now is facing a decline in its clients’ spending power, it managed to post double-digit revenue and operating-income growth through the third quarter of last year.
Importantly, Amazon’s long-term picture remains bright. The company is a leader in the high-growth markets of e-commerce and cloud computing. They both are forecast to rise in the double digits this decade.
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Amazon is taking steps now to ensure success down the road. It’s offering AWS clients less expensive data storage products to meet their needs today. At the same time, it’s expanding technology infrastructure to eventually grow the AWS business.
As for e-commerce, Amazon continues to add to Prime membership benefits. Today, membership has reached more than 200 million.
Tesla’s record year
Now let’s turn to Tesla. The leading EV maker reported record earnings last year — despite various headwinds. Tesla faced higher raw-materials costs and negative foreign-currency impact.
Still, Tesla managed to report record fourth-quarter revenue, operating income, and net income. And for the full year, net income on a GAAP basis reached $12.6 billion — that’s more than double the previous-year’s level. Tesla also delivered a record 1.31 million vehicles last year.
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If Tesla was able to perform this way during last-year’s difficult context, I’m confident about its ability to keep growing once general market conditions improve. The company aims to reach an average of 50% annual growth in vehicle deliveries over time. And considering Tesla’s performance so far and its new factories, there’s reason to believe it can reach that goal.
In more good news, Moody’s Investors Service recently raised Tesla’s credit rating to investment grade from junk by lifting the rating one level to Baa3. This allows Tesla to benefit from better rates when borrowing for projects. It also may boost investor confidence in the vehicle maker.
Tesla’s U.S. market share declined to about 57% in November from 77% a year earlier, according to S&P Global Mobility. That’s as more EV models enter the market. This increase in vehicles in the market should weigh on market share for all brands, the firm predicts. That said, Tesla’s growth so far, brand strength, and work to ramp up production could keep the company in the lead.
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Benefiting from a bull market
Both Amazon and Tesla currently are trading at reasonable valuations. Amazon shares are trading at their lowest in relation to sales since 2015. Tesla shares are trading for 47 times forward earnings estimates, down from more than 80 a year ago.
Amazon and Tesla depend on consumer spending. And considering the expenses involved in building out their infrastructure and operating their businesses, they suffer during times of rising inflation and high interest rates.
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These types of companies generally benefit and grow during stronger economic times. And that’s why Amazon and Tesla could be quick to take off — from earnings and share performance perspectives — during the next bull market.
