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Motley Fool Issues Rare “All In” Buy Alert
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This year, some of the most talked-about companies completed stock splits. These operations offer existing shareholders more shares — but the value of their investment and the market value of the company remain the same. The result is a lower price for each individual share. And that opens up the stock to a broader range of investors.
Good news, right? Yes. But these operations don’t necessarily boost a stock. In fact, two of this year’s big stock split stocks are heading for more than a 40% annual loss. I’m talking about Amazon (AMZN 1.08%) and Tesla (TSLA 2.09%). These difficult times are temporary, though. And Amazon and Tesla each look ripe for major gains. They may even soar in 2023. Let’s take a closer look.
Amazon shares climbed in recent years, reaching a high of more than $3,600 late last year. The e-commerce giant completed its 20-for-1 stock split back in June. But one main thing may have discouraged investors to pile in at the lower per-share price. And that’s the impact today’s economic woes have had on Amazon’s earnings.
Higher inflation has weighed on Amazon’s costs and on shoppers’ buying power. And Amazon has recorded quarter after quarter of decreasing operating income and operating cash flow. Return on invested capital also has dropped.
Why should we expect a rebound? For a few reasons. First, Amazon is a leader in two markets growing in the double digits: e-commerce and cloud computing. In fact, Amazon’s cloud computing business still is growing revenue and operating income in the double digits.
The business, Amazon Web Services (AWS), not only generates billions of dollars in revenue but it also is high margin. With operating margins averaging about 30%, AWS profits a great deal from every dollar sold.
As for e-commerce, Amazon continues to grow revenue and members in its Prime subscription program. These members are spending more and more. All of this means e-commerce is likely to take off once today’s economic troubles ease.
Today, Amazon is trading at its cheapest in relation to sales since 2015. At the same time, revenue still is on the rise and is at its highest level ever. Together, all of these elements give Amazon plenty of reason to soar — in 2023 or down the road.
Tesla completed its 3-for-1 stock split in August. That’s after the shares climbed past $1,000 late last year. But the stock hasn’t yet started a new phase of gains. Why? Electric vehicle (EV) stocks in general have fallen. Investors worried about the impact of higher inflation and supply chain issues on their businesses.
As for Tesla, investors didn’t like the fact that CEO Elon Musk sold 19.5 million shares of Tesla around the time of his Twitter acquisition. And they feared his involvement in Twitter could leave Tesla on the back burner.
But there are plenty of reasons to like Tesla — and be confident about the company’s future prospects. In the third quarter, Tesla faced its share of challenges. For example, higher prices of raw materials and a strengthening U.S. dollar (that lowers the value of sales made outside of the U.S.).
Even in this context, Tesla reported record revenue and operating profit. The EV giant also reached an operating margin of 17.2%.
Return on invested capital and free cash flow both are on the rise at Tesla.
TSLA Free Cash Flow data by YCharts
Vehicle deliveries climbed 42% to more than 343,000. And the company reiterated its goal for 50% average annual growth in deliveries.
Tesla also has the cash to power its growth over the coming years. The company has increased its cash levels from quarter to quarter. And in the third quarter, cash rose 31% to more than $21 billion year over year.
Tesla shares trade at 44 times forward earnings estimates. That’s down from more than 70 just a couple of months ago. Considering Tesla’s earnings momentum, the stock is a buy at today’s level. And this growth could result in a major increase for the shares next year and beyond.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Amazon and Tesla. The Motley Fool has a disclosure policy.
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