With the exception of artificial intelligence (AI), there is no hotter trend on Wall Street right now than companies doing stock splits.
A stock split is an event in which a publicly traded company cosmetically changes its stock price and number of shares outstanding by the same magnitude. It is “cosmetic” in the sense that changing the price and number of shares of a company by the same factor has no effect on its market capitalization or operating performance.
There are two types of stock splits: straight and reverse. With a forward stock split, companies seek to make their shares more affordable in theory to retail investors who may not have access to split stock purchases through their broker. At the same time, a reverse stock split aims to increase a company’s stock price, often with the aim of ensuring that it meets minimum standards for continued listing on a major exchange.
Most investors tend to favor forward stock splits because companies that do these splits are generally more innovative and successful than their peers.
Since the beginning of 2024, Nine leading stocks have announced or completed a stock split. However, not all of these stock split stocks share the same outlook. As we enter the second half of 2024, one of these stock split stocks stands out as a phenomenal deal for patient investors, while two others are worth avoiding.
#1 Split Stock to Avoid in H2 2024: Nvidia
Despite its undeniable popularity, the AI giant Nvidia (NASDAQ: NVDA) This is the first stock split I would suggest investors deliberately avoid for the last six months of 2024. Nvidia announced a prospective 10-for-1 stock split on May 22, which was completed on June 7.
Even though I’m not a fan of Nvidia from an investment standpoint, I’m happy to give the company where credit is due. Nvidia’s AI graphics processing units (GPUs) have set the standard in high-computing data centers. According to semiconductor analytics firm TechInsights, it was responsible for 98% of the 3.85 million AI GPUs that shipped last year. Being the first to invest and having computational advantages over its peers gave the company substantial pricing power.
But that’s where the praise ends and history comes back into the debate.
Since the advent of the Internet in the mid-1990s, no innovation, technology or fashion trend has escaped an event that sparked early euphoria. This means that investors have overestimated the adoption and/or usefulness of every innovation or cutting-edge technology for 30 years (including the Internet itself). While this doesn’t mean that AI and Nvidia can’t be phenomenally successful in the long term, the simple fact that most companies don’t have a concrete plan for AI suggests that a bubble is forming. .
To add to this point, Nvidia’s price-to-sales (P/S) ratio over the past 12 months is strikingly similar to the P/S ratio peaks we’ve seen since Cisco Systems And Amazon before the bursting of the Internet bubble. History may not repeat itself exactly on Wall Street, but it tends to rhyme.
We’re also starting to see evidence that competition will take a toll on Nvidia’s monopolistic market share in AI-accelerated data centers. Even if the company’s GPUs retained their compute advantages, new competitors could benefit from an overwhelming supply – and Nvidia can’t meet all of its company’s demand.
Additionally, Nvidia’s four largest customers by net sales are developing their own AI GPUs in-house. Even if these chips are used in addition to Nvidia’s H100 GPU, this is a testament to the willingness of America’s most influential companies to reduce their reliance on Nvidia’s hardware.
Split Stock #2 to Avoid in the Second Half of 2024: Chipotle Mexican Grill
The second split stock investors would do well to avoid in the second half of 2024 is none other than Wall Street’s hottest fast-casual restaurant chain, Chipotle Mexican Grill (NYSE:CMG). Chipotle’s board announced the company’s first-ever stock split (a 50-for-1 forward split) on March 19, with the adjustment of its shares taking place after the closing bell on June 25.
Similar to Nvidia, I can recognize that Chipotle and its management team have done a lot of good, even if I’m not currently a fan from an investment standpoint. Chipotle shares have risen more than 14,800% since their IPO price of $22 in January 2006, thanks to a combination of simplicity and innovation.
Chipotle kept things simple by sourcing vegetables locally (when possible), using responsibly raised meats, preparing their food daily, and avoiding a large menu. The result is a well-oiled machine that prepares meals quickly and keeps the lines at its stores moving.
But there’s only so much innovation that can be squeezed out of a fast-casual restaurant chain. While the introduction of dedicated mobile ordering drive-thru lanes (“Chipotlanes”) has helped the company immensely, Chipotle’s same-store sales grew just 7% in the first quarter. While 7% same-store sales growth would be phenomenal for most companies, it’s a downright horror for a company valued at roughly 50 times its full-year earnings.
I will also add that 1.6% of the 7% organic growth rate of existing stores comes from an “increase in average ticket”. While it’s always good news when a company enjoys strong pricing power, nearly a quarter of Chipotle’s organic sales growth is simply due to inflation.
Given that there are still predictive indicators that a U.S. economic slowdown is on the horizon—for example, the historic decline in U.S. M2 money supply—companies with premium valuations in traditionally slower-growing industries, such as Chipotle, are most likely to be hit hard if a recession materializes.
The Stock Split You Can Buy With Confidence for H2 2024: Sirius XM Holdings
Of the nine high-profile companies that have announced a stock split in 2024, eight are doing forward splits. However, the best value of the group is the only high-profile company expected to complete a reverse stock split: the satellite radio provider Sirius XM Holdings (NASDAQ: SIRI).
In a June 17 filing with the Securities and Exchange Commission, Sirius XM announced plans to conduct a 1-for-10 reverse split after completing its merger with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM GroupThis stock merger and consolidation, which will create a single basis of outstanding shares, is expected to be completed during the third quarter.
Although reverse stock splits are typically undertaken by declining companies, Sirius XM’s operating performance has indicated steady growth over the long term.
One of the keys to Sirius XM’s success is its revenue mix. Both terrestrial and online radio providers make the majority of their sales from advertising. The problem with advertising is that it’s highly cyclical and subject to fluctuations. Sirius XM made less than 19% of its sales in the first quarter from ads (via Pandora).
By comparison, Sirius XM generated nearly 78% of its sales in the quarter ended March from subscriptions. Subscribers to its satellite radio services are far less likely to cancel their subscriptions than companies are to cut advertising spending during times of economic turmoil. Add to that the fact that Sirius economic climate.
Additionally, Sirius XM enjoys better cost transparency than most radio operators. While content and royalty costs fluctuate from quarter to quarter, transmission and equipment expenses won’t change much, if at all, regardless of how many subscribers the company adds .
At no point in Sirius XM’s 30-year history as a publicly traded company has the company been cheaper than it is today. Opportunistic investors can pick up shares for just 8 times trailing earnings, a 55% discount to its average trailing earnings multiple over the past five years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon and Sirius XM. The Motley Fool has positions and recommends Amazon, Chipotle Mexican Grill, Cisco Systems and Nvidia. The Motley Fool has a disclosure policy.
1 Split Stock You Can Buy With Confidence for the Second Half of 2024, and 2 to Avoid was originally published by The Motley Fool
