In the pandemic era, many American technology companies enjoyed spectacular bull runs driven by impressive revenue and profit growth. But while this was great news for investors, it made their stocks expensive on a per-share basis and appeared to put them out of reach for new money. Stock splits solve this problem by dividing each share into several lower-priced units to reduce the company's stock price without changing its market cap -- the value of all its shares combined.
In 2022, Tesla (TSLA 0.15%) and Amazon (AMZN 0.01%) used this technique to make their shares more appealing to small investors. Both companies can continue to grow because of their solid fundamentals.
Tesla
Since its IPO in 2010, Tesla has delivered explosive stock price growth, with management relying on stock splits (most recently, a 3-for-1 conversion in 2022) to keep its stock easily accessible to those smaller investors who don't have access to fractional share purchases. And while the electric vehicle (EV) maker faces challenges from competition and recently weakening consumer demand, its long-term thesis remains strong.
According to Bloomberg, Tesla's market cap shrunk by $145 billion since its third-quarter earnings call. At least one key issue: Rising interest rates are putting pressure on the market for new cars, which are usually purchased with loans. The good news is that this is a transitory macroeconomic challenge for Tesla, not a fault in its business model. While margins will be tighter in the near term, Tesla's economies of scale make it the only profitable U.S. EV company. While rival legacy automakers like Ford and General Motors are profitable as a whole, their EV segments are still losing money.
Positive margins give Tesla an advantage in price wars because the company can keep its prices lower for longer to maximize its market share as the industry matures.
Management's investments in other growth drivers such as energy storage could add diversification to Tesla's operations. Revenues from the company's energy and storage business grew by around 40% year over year to $1.56 billion in the third quarter, well outpacing the 5% growth rate in its automotive segment.
Amazon
With market cap up by almost 700% over the last decade, Amazon relied on stock splits to keep its shares liquid -- the most recent of which was a 20-for-1 conversion in June 2022. And while the company is probably too big to experience the same type of explosive growth it enjoyed in the past, profitability improvements and a pivot toward artificial intelligence (AI) could richly reward investors.
In the post-pandemic period, Amazon grappled with weak margins and the consequences of overexpansion, but management is finally getting those problems under control. While revenue increased by 13% year over year in the third quarter to $143.1 billion, the real magic happened on the bottom line: Operating income soared by almost 350% to $11.2 billion. Most of the gains were in Amazon's core e-commerce segment, where significant cost-cutting efforts are beginning to pay off.
Image source: Getty Images.
Under the leadership of CEO Andy Jassy, the tech giant laid off 27,000 people in 2023 and switched from a fulfillment network in the U.S. that was organized nationally to a more efficient network with eight distinct regions to improve delivery speed and reduce costs.
Its cloud computing segment, Amazon Web Services (AWS), is also performing well. In Q3, its operating income jumped 29% year over year to roughly $7 billion. Management plans to drive continued success in this business through artificial intelligence (AI) initiatives such as Amazon Bedrock, a platform designed to help clients build and scale generative AI applications within the AWS ecosystem.
Focus on the fundamentals
In past years, Amazon and Tesla enjoyed explosive growth that encouraged their management teams to split their stocks to keep them easily accessible to retail investors. But while stock splits can boost interest in a company's stock and improve its liquidity, investors should focus on the fundamentals. Amazon's e-commerce cost-cutting will support its profitability, while Tesla's economies of scale will help it maintain a dominant position in the EV market.
