What’s rarer than planets lined up in the night sky? The answer is that Wall Street’s two hottest trends are intersecting: artificial intelligence (AI) and stock splits.
AI, which involves the use of software and systems for tasks that humans would normally undertake or oversee, has the potential to completely change the long-term growth arc of businesses around the world. In a report published last year, PwC analysts estimated that AI could add $15.7 trillion to the global economy by 2030. With numbers this big, it’s not surprising to see the AI stocks soar.
Meanwhile, a stock split is an entirely cosmetic event that allows a publicly traded company to change the number of shares outstanding and its stock price by the same factor. It’s “cosmetic” in the sense that stock splits do not change a company’s market capitalization or operating performance.
Stock splits serve different purposes, depending on the type of split. A forward stock split is designed to make shares more affordable in theory for retail investors. On the other hand, a reverse stock split increases a company’s stock price in order to meet the minimum standards for listing on a major exchange. Most investors tend to gravitate toward companies that are doing future spinoffs, as we’ve seen among AI stocks recently.
Nvidia, Broadcom Launch Stock Split Madness Among Artificial Intelligence Stocks
In a matter of weeks, we saw the two most influential AI companies announce a stock split. NvidiaIt is (NASDAQ:NVDA) advice gave the green light to a 10-for-1 stock split on May 22which was finally completed after close of business on June 7. Broadcom (NASDAQ:AVGO) announced its first-ever stock split (also 10-for-1) on June 12, with an effective date of July 15.
Nvidia’s high-power graphics processing units (GPUs) have quickly become the go-to chip for businesses operating AI-accelerated data centers. Orders for H100 GPUs overwhelmed supply, allowing Nvidia to significantly increase the price of these chips and increase its adjusted gross margin.
According to semiconductor analytics firm TechInsights, Nvidia accounted for 3.76 million of the 3.85 million AI GPUs shipped in 2023. Boasting first-mover advantages, a 98% market share and a long list of GPU AI successor architectures (Blackwell and Rubin), prompted Nvidia’s board to make the company’s second split in three years.
As for Broadcom, it has become a key player in AI-accelerated networks. The company’s Jericho3-AI chip is capable of connecting up to 32,000 GPUs, which can leverage their full processing capacity, reduce tail latency, and power the training of large language models and generative AI solutions.
Broadcom has also formed a handful of AI partnerships. Last year he joined forces with Alphabet to improve the cybersecurity of generative AI on Google Cloud. More recently, Broadcom has formed a working relationship with Dell Technologies to provide the latter with the AI ​​connectivity solutions its customers are looking for.
But it’s not just AI stocks that look ripe for the stock split. Here are the three most logical candidates to become Wall Street’s next split stocks.
Costco wholesale
The first title that seems obvious to announce a split sooner rather than later is Warehouse Club. Costco wholesale (NASDAQ: COST). Not counting Price Enterprises’ split in 1994, Costco has had three splits since becoming a public company, the last of which occurred in January 2000. While its shares closed at a record high of nearly 856 $ On June 14, the stage is absolutely set for a stock split.
Costco’s broad outperformance versus the benchmark S&P500 over several decades comes down to its undeniable competitive advantages, first and foremost its size. Buying your products in bulk reduces the cost of each unit purchased. This allows it to undercut the prices of local stores and even national grocery chains. The company’s management team learned long ago that price advantages help attract consumers to its stores.
To add to this point, Costco was able to convince its members to purchase items that were not on their shopping list. Although groceries have razor-thin margins, discretionary purchases tend to increase Costco’s operating margin.
The other advantage for Costco is its membership model. Paying $60 or $120 for an annual subscription will encourage consumers and businesses to get the most out of their membership. In other words, they will make Costco their one-stop destination whenever possible. The high-margin subscription revenue that Costco brings in mitigates its thin margins on groceries.
MicroStrategy
Another logical candidate for doing a stock split is the business analytics software provider. MicroStrategy (NASDAQ:MSTR). MicroStrategy carried out a 2-for-1 split in January 2000, but was forced to do a reverse 1-for-10 split in July 2002 to ensure its continued market listing. Nasdaq stock market following the bursting of the Internet bubble. The company’s stock closed last week at nearly $1,496 per share.
Although MicroStrategy has its analytics software business, the lion’s share of its nearly $27 billion valuation rests on its ties to Bitcoin (CRYPTO:BTC). CEO Michael Saylor, who firmly believes that Bitcoin is the future, oversaw the acquisition of approximately 214,400 Bitcoins for his company. Based on a fully mined supply of 21 million tokens for Bitcoin, MicroStrategy owns over 1% of the world’s largest cryptocurrency by market value.
The company is also on the verge of being a meme stock. Most cryptocurrency-focused businesses are heavily influenced by retail investors who don’t focus too much on traditional fundamental valuation metrics. A stock price near $1,500 may be a constraint for retail investors who do not have access to fractional share purchases.
But unlike Costco, MicroStrategy has no competitive advantage. Despite being the largest publicly traded holder of Bitcoin, the company’s software sales have been declining for a decade.
Its valuation is even more worrying. While approximately 214,400 Bitcoins have a current market value of $14.2 billion, MicroStrategy’s Bitcoin holdings are valued at a premium of nearly 80%. Given Bitcoin’s shortcomings as a currency and investment, MicroStrategy is a potential stock split stock worth avoiding.
Metaplatforms
The third logical candidate to become Wall Street’s next stock split is the only member of the ‘Magnificent Seven’ who has never done a split: a social media expert Metaplatforms (NASDAQ:META). Since going public in May 2012, Meta shares have gained more than 1,200%, closing at more than $500 on June 14.
Meta’s outperformance has everything to do with its prominent social media “real estate.” It owns Facebook, the world’s most popular social media platform, as well as Instagram, WhatsApp, Facebook Messenger and Threads. Collectively, all of its apps helped attract 3.24 billion daily active users in the quarter ended March. Businesses are willing to pay an advertising premium to get their message(s) across to Meta’s large audience.
Beyond its core advertising revenue, Meta is also gaining ground through its AI ambitions. The money-losing Reality Labs segment is aggressively investing in virtual/augmented reality devices, metaverse, and AI solutions. Although Reality Labs weighed on the results, Meta CEO Mark Zuckerberg has a long and successful track record in developing new platforms and is waiting until they have matured to fully monetize them.
The final piece of the puzzle that explains Meta’s continued success is its generous balance sheet. Meta closed March with more than $58 billion in cash, cash equivalents and marketable securities, and generated more than $76 billion in operating cash flow over the trailing 12 months. There’s little reason to believe its shares won’t rise in the long term, which makes a stock split all the more logical.
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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams holds positions in Alphabet and Meta Platforms. The Motley Fool holds positions and recommends Alphabet, Bitcoin, Costco Wholesale, Meta Platforms and Nvidia. The Motley Fool recommends Broadcom and Nasdaq. The Motley Fool has a disclosure policy.
Nvidia and Broadcom have each announced stock splits: these are the 3 most logical candidates to become Wall Street’s next split stocks. was originally published by The Motley Fool
