In case you haven’t noticed, the bull market on Wall Street is in full swing. The timeless Dow Jones Industrial Averagewidely supported S&P500and growth-driven Nasdaq Compositeall rose to multiple record highs in 2024.
While much of this optimism is attributed to the hype surrounding artificial intelligence (AI), it would be a mistake to ignore the role that investor euphoria has played in turning the tide for market-leading companies to implement stock splits .
A stock split is a tool that publicly traded companies can rely on to superficially adjust the share price and number of shares outstanding of their stock. This adjustment is cosmetic in the sense that it does not change a company’s market capitalization or impact operating performance in any way.
Since the start of 2024, more than a dozen leading companies have completed stock splits, and all but one were of the forward variety. A forward split makes shares nominally cheaper for retail investors who do not have access to fractional share purchases through their broker.
Right now, one of these high-profile stock split stocks makes for a no-brainer purchase, while another is full of warnings.
The beautiful stock split that’s sending all the right signals to investors is a Japan-based consumer electronics behemoth Sony group (NYSE: SONY). Sony’s American Depositary Receipts (ADRs) completed a 5-for-1 forward split on October 8, dropping Sony’s stock price from the mid-$90s to around $19.
Some investors may be hesitant to put their money into Sony as Sony is in the middle of a console development cycle. The PlayStation 5 (PS5) was released about four years ago, and it will likely be at least another two years before the company’s next-gen console hits stores. It’s not unusual for console sales to lag this late in the cycle.
However, Sony Group has been able to pull a number of levers to strengthen its important gaming segment.
In August, the company announced it would increase the price of its PS5 console by 19% in its home market of Japan. In addition, PlayStation Plus revenues have increased. This is a subscription service that allows people to game with their friends, access exclusive titles, and store their data in the cloud. It is a way to build on this very profitable business segment with relatively high margins.
Another thing to consider is that Sony Group shares often rise well before the release of the next-generation gaming console. Gaming and network services accounted for 28% of Sony’s consolidated revenue in the last quarter, and this figure could increase significantly when the next-generation console hits stores in two or three years.
But Sony Group has more to offer than meets the eye. Alongside the PS5, it is a major player in film and television production, music streaming and publishing, and is vital to the smartphone industry. The company’s Imaging and Sensing Solutions segment is seeing double-digit revenue growth from the quarter ended June 30, partly due to high demand for image sensors used in next-generation smartphones. The 5G revolution has led to a consistent device replacement cycle, which has clearly been beneficial for Sony.
To wrap it all up, Sony Group looks like a great value amid a historically expensive stock market. The company’s shares currently trade at 14 times next year’s expected earnings. Given Sony’s current and future catalysts, long-term investors shouldn’t be shy about jumping into this electric stock split.
At the other end of the spectrum is a stock split that should be avoided at all costs. Although I have been critical of the valuations of a few high-flying stock split stocks, including AI kingpin Nvidia and fast-casual restaurant chain Chipotle Mexican GrillNone of these market-leading companies can match the AI-focused business analytics software company’s valuation premium MicroStrategy (NASDAQ:MSTR) brings to the table.
With stock prices having risen from approximately $142 per share at the end of 2022 to $2,000 per share on an intra-day basis at the end of March 2024, it made perfect sense for MicroStrategy’s board to take advantage of the stock split euphoria and a 10- anniversary announcement. for-1 forward split in July. Retail investors have played a key role in driving MicroStrategy’s stock higher, so it was a smart move to lower the company’s share price to make it nominally more affordable to ordinary investors.
But this is all the praise MicroStrategy will get from me.
Although nominally a software company, MicroStrategy’s inflated $44.4 billion market cap has little to do with business analytics software. Rather, it is the No. 1 business owner of Bitcoin (CRYPTO: BTC)the largest cryptocurrency by market value. Based on a September 20 filing with the Securities and Exchange Commission, MicroStrategy held 252,220 Bitcoin, representing 1.2% of the outstanding supply of Bitcoin that will ever be mined (21 million tokens).
As of this writing on October 21, a single Bitcoin would earn an investor $67,464. This means that MicroStrategy’s Bitcoin assets are worth $17.02 billion. However, MicroStrategy’s Bitcoin portfolio is currently valued by Wall Street at over $43 billion (assuming a generous valuation of around $1 billion for the software division). To put this into perspective, investors who are bullish on Bitcoin could now buy it directly from a crypto exchange for $67,464. But if you buy shares of MicroStrategy, you’ll pay a premium of about 155%, or about $172,000 per token. This is a premium for the ages, and it won’t end well for investors.
To make matters worse, MicroStrategy has funded its Bitcoin purchases by selling billions of dollars of convertible debt. With the company’s software segment losing money and generating minimal operating cash flow, there is a very real chance that MicroStrategy will be unable to pay off its outstanding debt.
Finally, the bull case for Bitcoin is highly debated. It has demonstrably failed in its real-world example in El Salvador, and we have witnessed multiple next-generation blockchain networks validating transactions cheaper and faster. Furthermore, Bitcoin’s perceived scarcity is a function of computer code and is not necessarily written in stone.
The outlandish valuation premium currently awarded to MicroStrategy is simply not sustainable.
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*Stock Advisor returns October 21, 2024
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Chipotle Mexican Grill, and Nvidia. The Motley Fool recommends the following options: Short December 2024 put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
1 Great Stock Splits You Should Buy Right Now and 1 You Should Avoid at All Costs was originally published by The Motley Fool
