Amid the recent stock splits in Amazon (AMZN 10.36%) and Google parent Alphabet (GOOGL 1.84%) (GOOG 1.79%), investors seem anxious to hear about the next company that wants to employ this strategy.
Stock splits do not change the financials of a company on the surface. The process merely divides shares, meaning a 2-for-1 stock split would double the number of shares while cutting the share price in half. However, a lower nominal price makes whole shares more affordable to small investors, providing a possible psychological boost. Given high nominal prices, we feel Palo Alto Networks (PANW 1.40%), MercadoLibre (MELI 1.24%), and Broadcom (AVGO 0.35%) could benefit from such a move.
With this cybersecurity star’s shares trading near $500, is it time for a stock split?
Jake Lerch (Palo Alto Networks): With shares trading around $480 each, Palo Alto Networks is my choice for a technology stock that should initiate a stock split.
Palo Alto provides cybersecurity solutions to medium to large-scale organizations, including governments, businesses, and non-profits. The company operates across two segments: Product, which includes physical and virtual firewall offerings, and Subscription and Support, comprised of its cloud-based threat intelligence software and consulting services.
With cybercrime a huge and growing problem, Palo Alto is well-positioned to benefit from the increased need for cybersecurity. One study suggests that the global cybersecurity market may triple from $140 billion in 2021 to $376 billion by 2029.
What’s more, the company’s integrated approach seems to be winning over customers. By providing a comprehensive suite of hardware and software solutions, Palo Alto seeks to reduce its clients’ overall cost of cybersecurity. With over 80,000 enterprise customers alone, the results speak for themselves.
Palo Alto generated $5.17 billion of revenue over the last 12 months; quarterly revenue grew 29% from a year ago. Analysts expect the company to grow sales 21.5% this fiscal year (the period ending July 31, 2022) and a further 24% next fiscal year.
Yet, for investors who are bullish on Palo Alto, the prospect of paying nearly $500 for a single share might seem like a bridge too far. However, a hypothetical 5-for-1 stock split would lower the share price to a more manageable $97/share. That may entice more retail investors who are hesitant to shell out for high-priced stocks or do not want to deal with fractional shares in their accounts.
This fast-growing e-commerce company is worth a closer look
Justin Pope (MercadoLibre): Investors seem to overlook e-commerce company MercadoLibre because of its Latin American roots and $800 share price, making it difficult for retail investors to accumulate many shares at a time. A stock split could be just the medicine the stock needs.
For example, a 10-for-1 stock split would reduce the share price from $800 to $80 per share while giving investors 10 shares for each one they already own. Stock splits often attract attention, but that’s a good thing considering how strong a business MercadoLibre is.
MercadoLibre has roughly 25% market share of all e-commerce sales in the Latin American region. The company was founded in 1999 and has spent years investing and building logistics to fulfill e-commerce orders throughout the region.
Additionally, MercadoLibre has become an ecosystem for the Latin American consumer. The company has its e-commerce marketplace, of course, but it also has a full-fledged logistics business, digital wallet, and payments segment, and functions as a lender.
MercadoLibre has maintained strong growth from the pandemic. Net revenue grew 67% year over year in the first quarter of 2022 and averaged 53% annual growth over the past five years.
Latin America is an emerging market where the economy is behind countries like the U.S. but is rapidly growing. According to Statista, e-commerce sales in the region were $85 billion in 2020 and could double to $165 billion by 2025, meaning that MercadoLibre’s strong growth could continue for several years.
The ongoing bear market hasn’t spared MercadoLibre; the stock has fallen nearly 60% from its peak. The good news? The stock’s valuation has become a deal to consider. The price-to-sales ratio is now just 5, its lowest in more than five years.
A split could boost this company’s already impressive stock and dividend returns
Will Healy (Broadcom): Perhaps no tech stock has delivered higher dividend returns than Broadcom. The current 3.2% cash return on its $16.40 per share annual dividend makes it a high-yield tech stock. Additionally, its payout hikes are so impressive that those who bought in 2009 and held may earn more than their initial investment back every year in dividend income alone!
Additionally, this dividend may have contributed to its considerable long-term growth. Even after dropping by around 25% from its 52-week high, its stock sells for more than $530 per share. And given its business, investors should expect it to move higher over time.
Its largest enterprise is its semiconductor solutions segment. It collaborates with large clients to develop specialized chips that will serve client needs, though it gets some indirect consumer exposure. A Broadcom chip powers the personal hotspot on late-model Apple (AAPL 3.28%) iPhones, for example.
Broadcom also derives revenue from an infrastructure software segment. It provides management and security-related software to other businesses. This segment will also receive a considerable boost, assuming Broadcom successfully closes its upcoming merger with VMware (VMW -0.14%). This purchase will enhance Broadcom’s hybrid cloud and digital workspace capabilities and lead to a rebranding of Broadcom’s software segment under the VMware name.
And it continues to grow. In the first two quarters of fiscal 2022 (ending May 1), Broadcom reported $15.8 billion in revenue, 19% more than the same period in fiscal 2021. Thanks to reductions in the cost of revenue and operating expenses, net income for the first half rose to $4.9 billion, 81% more than the first two quarters of fiscal 2021.
Such growth makes it more compelling, considering its 26 price-to-earnings ratio. That is close to the lowest earnings multiple in three years and could help increase the stock’s appeal once the market recovers. And with a lower price initiated by a stock split, more investors could profit from its fast-growing dividend and potential for further increases.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet (C shares) and Amazon. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in MercadoLibre. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, MercadoLibre, and Palo Alto Networks. The Motley Fool recommends Broadcom Ltd and VMware and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.