Stock splits often cause excitement and excitement among investors, but not all splits are created equal. Some stock splits point to fantastic long-term growth stories and great investment opportunities, while others may be overvalued speculation stories that ultimately lead to disappointment.
On that note, the June 2024 stock split calendar features two household names, and I recommend buying one now, but not the other.
The stock you should buy: Chipotle
Mexican fast food giant Chipotle Mexican Grill (NYSE:CMG) will undergo a 50-for-1 stock split on June 26, 2024. While the split will see individual share prices drop from $3,155 to around $63, the real appeal lies in the company’s robust fundamentals and growth prospects.
While Chipotle isn’t cheap by conventional profitability measures — with a price-to-earnings (P/E) ratio of 68 and a price-to-free-cash-flow (P/FCF) ratio of 66 — its earnings are based on a sales ratio (P/S) of 8.6x is more palatable. This is especially notable given the robust profit margins the company enjoys in the competitive restaurant industry.
A key factor that sets Chipotle apart is its strategy of direct ownership of its restaurants. It’s an unusual approach in today’s foodservice industry, where most brands prefer to manage a number of franchisee locations.
Chipotle’s more hands-on approach not only supports product quality, but also promotes better employee relations, leading to higher service standards and customer satisfaction. This commitment to quality and operational efficiency drives Chipotle’s strong financial performance and market position.
The company’s ability to innovate with menu offerings, such as the successful introduction of lifestyle bowls and plant-based options, continues to attract a diverse customer base. Additionally, Chipotle’s robust digital strategy, which includes a popular app and efficient delivery services, has significantly increased sales and customer loyalty. With a well-defined expansion plan and an unwavering focus on sustainability, Chipotle is well positioned for long-term growth.
It is important to note that stock splits in themselves do not inherently add value to stocks; they simply make expensive stocks more affordable to a wider range of investors. The approval of a split may be seen by the board of directors as a vote of confidence in future stock gains, but it is largely accounting gymnastics. Nevertheless, Chipotle looks like a buy right now for the reasons above, making the upcoming stock split an opportune time for investors to enter or add to their position in this high-performing stock.
The stock to avoid: Nvidia
On the other hand, Nvidia (NASDAQ: NVDA) executed a 10-for-1 stock split this weekend, effective the morning of June 10. While Nvidia is a leader in the generative AI boom and has an excellent track record, the stock’s high valuation is cause for concern.
Nvidia stock trades at an extremely high 70x earnings, 37x revenue, and 75x free cash flow. These multiples suggest that much of the company’s future growth potential is already priced in, leaving little room for error.
By comparison, Chipotle’s valuation ratios — while also high — are less concerning. Its earnings-based numbers are similar to Chipotle’s, but the Mexican restaurant manager’s price-to-sales ratio at 8.6x is significantly lower than Nvidia’s (37x). Profits come and go much faster than sales, and can be manipulated with cost controls and accounting tricks.
For example, about 31% of Nvidia’s annual operating expenses are currently recorded in the form of stock-based compensation – and that ratio is rising. Chipotle also boosts its bottom line with stock-based compensation, but that’s only 14% of the company’s operating costs. Nvidia is more vulnerable to stock price fluctuations, adding uncertainty to an already highly competitive market space.
Imagine a rival Advanced micro devices (NASDAQ: AMD) undermining Nvidia’s dominant position in AI systems with energy-efficient and price-competitive AI accelerator chips. The sudden presence of a strong challenger could dent Nvidia’s lofty stock valuation, perhaps inspiring top tech talent to look for work elsewhere and undermining Nvidia’s longer-term prospects.
I recently sold some of my Nvidia stock and reinvested the profits in another high-growth stock with a lower valuation. By diversifying my portfolio, I balance potential growth opportunities while managing risk in an unpredictable market. With or without a stock split, Nvidia certainly looks risky at current prices.
Why Chipotle is the Better Stock Buy in June
Nvidia’s steep valuation and high stock-based compensation costs pose significant risks in a competitive technology landscape. At the same time, Chipotle’s robust profit margins and strategic growth initiatives make it a solid investment idea right now.
I agree that Nvidia’s stock split also serves the same confidence function as Chipotle’s, but the restaurant chain’s statement looks stronger. So if you’re looking for a stock split to buy today, I recommend taking a closer look at Chipotle while staying away from Nvidia.
Should You Invest $1,000 in Nvidia Now?
Consider the following before buying shares in Nvidia:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $740,690!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Anders Bylund has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Chipotle Mexican Grill, and Nvidia. The Motley Fool has a disclosure policy.
1 Stock-Split Stock to Buy Hand Over Fist in June and 1 to Avoid was originally published by The Motley Fool
