This has been nothing short of a phenomenal year for Wall Street and the investing community. The timeless Dow Jones Industrial Averagebenchmark S&P500and focused on growth stocks Nasdaq Composite have posted gains of 19%, 26% and 27% respectively as of the closing bell on November 27, hitting multiple all-time highs.
While the artificial intelligence (AI) revolution has been undeniably important in lifting the broader market, it would be unwise to ignore the role that stock split euphoria has played in pushing up a number of market-leading companies this year.
Do you miss the morning spoon? Breakfast news delivers it all in one fast, silly and free daily newsletter. Register for free »
A stock split is a tool that publicly traded companies can use to cosmetically adjust their stock price and outstanding share count by the same amount. These changes are “cosmetic” in the sense that adjusting a company’s share price and number of shares does not affect its market capitalization or underlying operating performance.
Stock splits come in two varieties, with investors flocking to one more than the other. The less popular of the two are reverse splits, which are intended to increase a company’s share price, often with the aim of ensuring its continued listing on a major stock exchange. This type of split is usually done by struggling companies and requires a lot of extra research on the part of investors.
In comparison, investors are attracted to companies that conduct long-term stock splits. A forward split is intended to make a company’s shares more nominally affordable to retail investors and/or employees who do not have access to purchases of fractional shares from their broker. This type of split is almost always carried out by companies that conveniently outperform and innovate better than their competition.
Since the start of 2024, more than a dozen leading companies have announced or completed stock splits, all but one of the forward variety. However, the prospects for these companies differ considerably.
As we head into December and prepare to turn the page on 2024, one historically cheap stock split is begging to be bought hand over fist, while another previously high-flying AI stock is worth avoiding.
Although there have been well over a dozen forward stock splits this year, the most attractive of all the splits in December is the only branded company to have done a reverse split. I’m talking about a satellite radio operator Sirius XM Holdings (NASDAQ: SIRI).
What makes Sirius Instead, the move almost certainly put Sirius XM stock back on the radar of Wall Street’s top money managers. Some institutional investors won’t buy stocks trading below $5 per share. Sirius XM’s 1-for-10 reverse split solved this minor problem.
In addition to a historic split, Sirius XM also merged with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group. Although Liberty Media has been a majority owner of Sirius XM, tracking stock has never been particularly successful at matching the performance of Sirius XM stock. Merging these tracking stocks with Sirius XM created a single class of common stock that removed any confusion and arbitrage from the equation.
But enough about the logistics. Let’s take a look at why Sirius XM makes it easy for investors to buy hand over fist now.
For starters, it’s a legal monopoly. While Sirius XM continues to face competition from terrestrial and online radio providers for listeners, it is the only licensed satellite radio operator. Having a sustainable moat gives the company exceptional power in subscription pricing, which it leans on to stay ahead of the inflation curve.
Another clear competitive advantage for Sirius XM is its revenue diversity. While traditional radio operators generate most of their revenue from advertising, Sirius is positioned to face inevitable economic downturns than terrestrial and online radio providers.
In addition, Sirius XM has enjoyed a degree of cost predictability that traditional radio operators lack. For example, transmission and equipment costs will not change much, if at all, regardless of how many subscribers the company has.
Last but not least, Sirius XM stock is historically cheap and yields over 4%. Shares can be snapped up by opportunistic investors for as little as eight times next year’s earnings, which represents a 50% discount to the company’s average price-to-earnings (P/E) ratio over the past five years.
However, not every stock with a stock split will be a winner. Although a terribly A strong argument can be made for this MicroStrategy If the December (and future) stock split is to be avoided, I’ve chosen to highlight an equally polarizing company with bleak prospects. Investors, meet the specialist in customizable rack servers and storage solutions Super microcomputer (NASDAQ: SMCI).
As recently as February 2023, shares of Super Micro could be purchased by investors at a pre-split price of around $80. But in March of this year, Super Micro’s stock skyrocketed to over $1,200 per share, ultimately forcing the company’s board of directors to approve its first-ever split (10-to-1), which occurred after the close of trading on September 30.
On paper, Super Micro Computer is perfectly positioned to benefit from the rise of AI. Companies that want to be at the forefront of AI innovation are investing aggressively in the data center infrastructure needed to make this possible. According to the company, sales shot up 110% to $14.94 billion in fiscal 2024 — Super Micro’s fiscal year ends June 30. Furthermore, the Wall Street consensus calls for revenue to increase another 67% to approximately $25 billion in fiscal 2025.
To add fuel to the fire, Super Micro has it built in Nvidia‘s graphics processing units (GPUs) in its rack servers for AI-accelerated data centers. Nvidia’s GPUs are superior from a computing perspective, and companies are lining up to purchase Super Micro’s data center infrastructure that houses this industry-leading hardware.
While certain aspects of Super Micro Computer’s business are doing well, there are three main reasons why investors would be wise to keep their distance.
Super Micro’s most glaring negative is the uncertainty surrounding its financial statements and continued listing on the US stock exchange Nasdaq stock exchange. In late August, short seller Hindenburg Research released a report alleging “accounting manipulation” at Super Micro. Since the publication of this report, the company has postponed its annual filing and the previous auditor, Ernst & Young, has had to resign. In addition, the company has had to submit a plan to the Nasdaq to (hopefully) prevent its shares from being delisted.
Second, Super Micro is at the mercy of its suppliers. With orders for Nvidia’s H100 GPUs lagging behind, Super Micro is at risk of not being able to fill orders for its own customers.
The third problem is that every next-big-thing innovation for thirty years, dating back to the advent of the Internet, has worked its way through an early-stage bubble. Investors consistently overestimate how quickly a new technology or innovation will be adopted and become useful, and there is no indication that artificial intelligence will be an exception. If the AI bubble were to burst, orders for Super Micro’s data center infrastructure could quickly dry up.
While Super Micro Computer stock is likely to remain volatile for the foreseeable future, it should remain off-limits to investors until the accounting questions are concretely answered.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Nvidia: If you had invested $1,000 when we doubled in 2009, you would have $358,460!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $44,946!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $478,249!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns November 25, 2024
Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
1 Historically Cheap Stock Splits to Buy By Hand in December and 1 Potentially Problematic Artificial Intelligence (AI) Stock Splits to Avoid was originally published by The Motley Fool
