Since the start of 2023, no trend on Wall Street has captured more investor attention than the rise of artificial intelligence (AI). But over the past eight months, the excitement surrounding stock splits in top companies has played a close second fiddle.
A stock split offers listed companies the opportunity to cosmetically adjust their share price and the number of shares outstanding by the same factor. The ‘cosmetic’ aspect of splits has to do with the fact that they do not change a company’s market capitalization and have no impact on underlying operating performance.
In 2024, just over a dozen high-profile companies have announced or completed a stock split, all but one of the forward-split variety. Forward splits are intended to reduce a company’s stock price so that it becomes nominally more affordable to retail investors. More importantly, the companies that execute forward splits almost always do so from a position of operational strength.
As we head into the fourth quarter, one bargain-basement stock split stands out as ripe for the picking for opportunistic value seekers. In the meantime, growth investors might be wise to steer clear of another stock split that has been the buzz of the AI movement.
These historically cheap stock splits can be chosen with confidence by patient investors
The unique stock split that makes for a no-brainer purchase in the fourth quarter is none other than a satellite radio operator Sirius XM Holdings (NASDAQ: SIRI).
What makes the Sirius XM split “unique” is that it is the only company I alluded to above that did not complete the forward split.
On December 12, 2023, Sirius XM unveiled plans to merge with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. Liberty Media is the majority shareholder in Sirius XM, and the different classes of Sirius Plus, they’ve never followed Sirius XM stock particularly closely. The merger of these share classes, which took place after the stock market closed on September 9, has cleared up some confusion.
In addition to creating a single class of Sirius to be removed. The split was previously intended to increase the share price and thus make it more attractive to institutional investors and fund managers.
Besides being Wall Street’s most anticipated reverse stock split of 2024, Sirius XM offers investors three compelling reasons to buy its stock.
For starters, there’s a level of cash flow predictability with Sirius XM that terrestrial and online radio companies can’t match. The difference can be seen in the way Sirius XM generates its revenue compared to traditional radio operators.
For terrestrial and online radio, most revenue comes from advertising. While this strategy works well during long periods of economic growth, it can lead to lean times during recessions. By comparison, Sirius Subscribers are less likely to cancel their service during periods of economic instability than companies are to scale back their advertising spend.
The second compelling reason to buy Sirius XM stock is the moat. As the only licensed satellite radio operator, the company has significant power over subscription prices. In cases where subscriber growth slows or turns in a reverse direction, the company has the option to raise prices and increase revenue.
Finally, Sirius XM’s low valuation is very attractive. As of the closing bell on September 27, the company’s shares were valued at 7.5 times estimated 2025 earnings per share (EPS). Even with revenue growth currently stagnant, this is the company’s cheapest forward earnings figure since its IPO . September 1994.
The parabolic rise of this stock split appears unsustainable
However, not all stocks with a stock split are necessarily worth buying. Even though companies that perform forward splits have historically outperformed the benchmark S&P500 in the twelve months following their split announcement, I would suggest avoiding the artificial intelligence kingpin in the fourth quarter (and beyond) Nvidia (NASDAQ: NVDA). Nvidia completed its historic 10-for-1 split in June.
To be fair, Nvidia has done a lot of things right. The AI graphics processing units (GPUs) are the undisputed first choice among companies building data centers with high computing power. After accounting for an estimated 98% of AI GPUs shipped to data centers in 2022 and 2023, Nvidia appears to have ceded very little market share so far in 2024.
Nvidia also gets a lot of help from its CUDA software platform. CUDA is the toolkit developers use to build large language models and maximize the computing power of their Nvidia AI GPUs. The best way to think of CUDA is as the lure that keeps companies loyal to Nvidia’s ecosystem of products and services.
But despite these early gains, Nvidia offers some warning signs that should give investors pause.
For example, competition is inevitable for Nvidia. Even if the H100 and Blackwell GPUs maintain their computing advantage, the large gap in Nvidia’s hardware, combined with cheaper prices for competing chips, could cause companies to look elsewhere for their data center needs.
Internal competition should also not be overlooked. All four of Nvidia’s largest customers by net revenue are developing AI GPUs for use in their data centers. This seems to be a clear signal that America’s most influential companies want to reduce their dependence on the AI queen’s hardware.
Another reason why Nvidia’s parabolic rise is concerning has to do with what insiders are telling us. Specifically, CEO Jensen Huang has been a persistent seller of his company’s stock since mid-June, and no insider has purchased Nvidia stock on the open market since December 2020. If insiders don’t consider their shares a bargain, why should they be investors every day?
Perhaps the biggest red flag with Nvidia is that no breakthrough technology or innovation over 30 years has been able to prevent a bubble-bursting event early in its existence. In other words, the investing community has regularly overestimated the adoption/introduction of next-big-thing technologies. When these lofty expectations fail to materialize, the music inevitably stops short of hyped innovations.
Considering that a majority of companies still do not have a clear game plan on how they will generate a positive return on their AI investment, we appear to be witnessing the early stages of a bubble burst. If and when the AI bubble bursts, no company will likely be hit harder than Nvidia.
Should You Invest $1,000 in Sirius XM Now?
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
1 Bargain Basement Split Stocks to Buy Hand Over Fist in the 4th Quarter and 1 High Flyer to Scare Away was originally published by The Motley Fool
