Volatility and uncertainty are issues that every investor must face. Even though we are in a heartbreaking roar bull market Currently, this decade has started with the three major stock indexes trading in bear and bull markets in successive years (until 2023).
For the longest time, when things got tough on Wall Street, investors looked for the safety of FAANG stocks. But over the past three years, it’s the stocks that have split that have been investors’ safety blanket.
A stock split is a mechanism that allows a publicly traded company to change its stock price and number of shares outstanding without affecting its market capitalization or operating performance. Stock splits come in two forms: straight and reverse.
With a forward stock split, a company intends to reduce its stock price to make its shares more affordable in theory to ordinary investors who might not be able to purchase fractional shares from of their broker. Companies sometimes also conduct forward stock splits to encourage their employees to participate in an employee stock purchase plan.
At the same time, a reverse stock split aims to increase a company’s stock price to ensure it meets minimum standards for listing on a stock exchange.
For all intents and purposes, investors have gravitated toward high-flying stocks that practice forward splits. Since the beginning of this year, eight leading companies with well-defined competitive advantages have announced and/or carried out stock splits.
However, the outlook for these eight split stocks varies widely. While two of these stock splits can be purchased with confidence by patient investors, another could disappoint its shareholders.
#1 Split Stock That Can Be Buy With Confidence Right Now: Broadcom
Among the 2024 class of split stocks, none appear to have a brighter future than the semiconductor solutions giant. Broadcom (NASDAQ:AVGO). Broadcom’s board of directors approved a 10-for-1 stock split on June 12 (the first in company history), with an effective date of July 15.
There is absolutely no doubt that artificial intelligence (AI) has fueled Broadcom’s stock rally. The company decisively entered the AI-accelerated data center space last year by introducing its Jericho3 chip, responsible for connecting up to 32,000 high-end graphics processing units (GPUs) in AI-accelerated data centers. Broadcom’s networking solutions reduce residual latency and accelerate the computation and decision-making needed for AI-based software and systems.
While there are viable arguments that AI will eventually succumb to a blowout event in the same way as every other high-profile innovation over the past three decades, Broadcom’s secret is that it does so much more than simply developing AI-based solutions.
For example, a significant portion of its sales and operating cash flow comes from the sale of wireless chips and accessories found in smartphones. Wireless providers upgrading their networks to support 5G speeds and gradually expanding their 5G coverage to businesses and residential consumers across the country have led to an ongoing cycle of device replacement that is fueling demand for next generation wireless solutions from Broadcom.
Broadcom also offers an assortment of products and solutions beyond smartphones. It provides sensors used in automated industrial equipment, develops connectivity solutions for vehicles, and offers financial software and cybersecurity solutions, as well as a host of other products and services that go far beyond smartphones and high-computing data centers.
Broadcom is ideally positioned to navigate an AI bubble, should one arise. While its forward price-to-earnings ratio of 29 isn’t cheap in the traditional sense, Broadcom’s ability to generate annualized earnings growth of around 20% makes this valuation much more palatable to long-term investors.
Split Stock #2 That Can Be Picked Up With Confidence Right Now: Sony Group
The other stunning 2024 split stock that can be gobbled up with confidence by investors right now is the Japan-based consumer electronics titan. Sony Group (NYSE:SONY). Sony’s board of directors announced plans to conduct a 5-for-1 forward split on May 14, with an effective date for the company’s American Depositary Receipts (ADRs) of October 8.
It’s no secret: the video game industry is cyclical. The PlayStation 5 gaming console has been on store shelves for over three years, leading to a slight decline in sales. The good news for Sony is that it has other catalysts that can drive its valuation and earnings higher until the next-gen console debuts (likely in 2027).
For example, although console sales are not impressive, revenue from PlayStation Plus subscriptions has increased. PlayStation Plus is the company’s service that allows subscribers to save their game data to the cloud and play games with friends. Subscription revenue is recurring, high-margin, and tends to generate significantly higher margins than hardware sales, like consoles. Think of it as the perfect setup of a razor (console) and blades (PlayStation Plus).
In addition to improving revenue from subscription games, Sony is a leading producer of image sensors used in next-generation smartphones. Just as Broadcom’s wireless chips are benefiting from the ongoing device replacement cycle, Sony is seeing a surge in sales in its Imaging and Sensing Solutions segment.
Sony Group is also the cheapest split stock among the eight high-profile companies to announce a split in 2024. The company’s shares can be acquired for less than 15 times the coming year’s earnings.
The icing on the cake is that the board of directors of the Sony group authorized a share buyback program in addition to its split. If fully executed, almost 2.5% of all outstanding shares will be eligible for repurchase, which should have a modestly positive impact on earnings per share and make this stock even more fundamentally attractive to investors focused on value.
The split stock to avoid: Nvidia
On the other end of the spectrum, the hottest AI stock on the planet, and arguably the most anticipated stock split company of 2024, Nvidia (NASDAQ:NVDA), is the highest flight to avoid. Nvidia announced a 10-to-1 forward split on May 22 – the second split since July 2021 – which took effect after the close of business on June 7.
On paper, Nvidia has done everything Wall Street (and some) expected of it. The company’s AI GPUs have been selling like hot cakes, with Nvidia unable to fulfill all the orders received. The obviously overwhelming supply allowed the company to increase the sale price of its H100 GPU and increase its adjusted gross margin to 78.4%, at the end of the first fiscal quarter (ending April 28). .
But even the best companies in the world face headwinds, and Nvidia’s are growing.
Throughout 2024, external competition in AI-accelerated data centers will intensify. Intel And Advanced microsystems deploy their direct competitors on Nvidia’s H100 GPU. What Wall Street and investors may be forgetting is that while Nvidia’s GPUs maintain a compute advantage, the company’s inability to meet enterprise demand opens the door to these new entrants to gain market share.
In addition, Nvidia faces competitive pressures within its own customer base. Its four largest customers, which account for about 40% of its net revenue, all develop AI GPUs for their data centers in-house. Again, while Nvidia’s chips remain far superior in many ways, the mere presence of these other chips reduces the scarcity of AI GPUs that fuels its pricing power. Translation: This is bad news for Nvidia’s adjusted gross margin.
The final piece of the puzzle, which I alluded to earlier, is that every highly touted trend, technology or fashionable innovation that has appeared in the last 30 years has met the same fate. Investors systematically overestimate how quickly a new innovation or technology will be adopted by the general public, leading to a bubble. It seems unlikely that AI will break this historical trend, which doesn’t bode well for Nvidia.
Should you invest $1,000 in Broadcom right now?
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Sean Williams holds positions at Intel. The Motley Fool holds positions and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
2 Split Stocks You Can Buy with Confidence Right Now and 1 to Avoid was originally published by The Motley Fool
