With the exception of artificial intelligence (AI), there is no trend more popular on Wall Street right now than corporate stock splits.
A stock split is an event in which a publicly traded company cosmetically changes its stock price and number of outstanding shares by the same amount. It is “cosmetic” in the sense that changing a company’s stock price and number of shares by the same factor has no effect on its market capitalization or operating performance.
There are two types of stock splits: forward and reverse. With a forward stock split, companies attempt to make their stock nominally more affordable to retail investors who may not have access to fractional share purchases through their broker. A reverse stock split, on the other hand, aims to increase a company’s stock price, often with the goal of ensuring that it meets minimum continuous listing standards on a major stock exchange.
Most investors prefer forward stock splits because the companies that implement forward splits tend to be more innovative and outperform their competitors.
Since the start of 2024, nine leading stocks have announced or completed a stock split. However, not all of the stocks that have split have the same outlook. As we head into the second half of 2024, one of these stock splits stands out as a phenomenal deal for patient investors, while two others are worth avoiding.
Stock Split, #1 Stock to Avoid in 2H24: Nvidia
Despite its undeniable popularity, AI is a behemoth Nvidia (NASDAQ: NVDA) is the first stock split I would recommend investors consciously avoid in the last six months of 2024. Nvidia announced a 10-for-1 forward split on May 22, which closed on June 7.
While I’m not a fan of Nvidia from an investment perspective, I like to give the company credit where it’s due. Nvidia’s AI graphics processing units (GPUs) have set the standard in high-compute data centers. According to semiconductor analytics firm TechInsights, it was responsible for 98% of the 3.85 million AI GPUs shipped last year. By having first-mover and compute advantages over its competitors, the company has gained significant pricing power.
But here the praise ends and history comes into play again.
Since the advent of the internet in the mid-90s, there hasn’t been a single buzzy innovation, technology, or trend that has avoided an early-stage euphoria event. That is, investors have been overestimating the adoption and/or usefulness of every subsequent major innovation or technology for the past 30 years (including the internet itself). While this doesn’t mean that AI and Nvidia can’t be wildly successful in the long run, the simple fact that most companies don’t have a concrete plan for AI suggests that a bubble is brewing.
To further emphasize this point, Nvidia’s price-to-sales (P/S) ratio over the past 12 months is strikingly similar to the P/S ratio spikes we saw in Cisco systems And Amazon before the dotcom bubble burst. History may not repeat itself exactly on Wall Street, but it does tend to rhyme.
We’re also starting to see evidence that competition will squeeze Nvidia’s monopoly, such as market share in AI-accelerated data centers. Even if the company’s GPUs were to retain their compute advantages, new competitors could take advantage of overwhelming supply demand — and Nvidia can’t meet all of its enterprise demand.
Additionally, Nvidia’s four largest customers by net revenue are developing their own AI GPUs internally. Even if these chips are used to complement Nvidia’s H100 GPU, it signals that America’s most influential companies are planning to reduce their reliance on Nvidia’s hardware.
Stock Split, #2 Stock to Stay Away From in Second Half of 2024: Chipotle Mexican Grill
The second stock that investors should avoid in the second half of 2024 is the most popular fast food chain on Wall Street. Chipotle Mexican Grill (NYSE: CMG). Chipotle’s board of directors announced the company’s first-ever stock split (a 50-for-1 forward split) on March 19, with the stock adjustment taking place after the closing bell on June 25.
Like Nvidia, I can acknowledge that Chipotle and its management team have done a lot right, even if I’m not currently a fan from an investment standpoint. Chipotle shares have risen more than 14,800% since their initial IPO price of $22 in January 2006, thanks to a combination of simplicity and innovation.
Chipotle has kept it simple by sourcing its produce locally (when possible), using responsible meats, preparing its food daily, and avoiding a big menu. The result is a well-oiled machine that turns out meals quickly and keeps the lines moving in its stores.
But there’s only so much innovation you can squeeze out of a fast-casual restaurant chain. While the introduction of mobile-ordering-specific drive-thru lanes (“Chipotlanes”) has helped the company immensely, Chipotle’s same-store sales grew by just 7% in the first quarter. While 7% same-store sales growth would be phenomenal for most companies, it’s a real thorn in the side for a company valued at roughly 50 times next-year earnings.
I should also add that 1.6% of the 7% organic growth in existing stores came from an “increase in the average check.” While it’s always good news when a company has strong pricing power, nearly a quarter of Chipotle’s organic sales growth was simply due to inflation.
Given that there are still leading indicators that a US economic downturn is coming (e.g., the historic decline in the US M2 money supply), highly valued companies in traditionally slower-growing sectors, like Chipotle, are most likely to take a hit if a recession does indeed occur.
The Stock Split Stock You Can Buy With Confidence for the Second Half of 2024: Sirius XM Holdings
Of the nine top companies that have announced a stock split in 2024, eight are doing a forward split. The best value of the bunch, however, is the only top company that will complete a reverse stock split: satellite radio provider Sirius XM Holdings (NASDAQ: SIRI).
In a filing with the Securities and Exchange Commission on June 17, Sirius XM announced it plans to conduct a 1-for-10 reverse stock split upon completion of its merger with Liberty Media’s Sirius XM tracking stock. Liberty Sirius XM GroupThis combination and share consolidation, which will create a single outstanding share base, is expected to close in the third quarter.
While reverse stock splits are typically used by declining companies, Sirius XM’s operating performance points to steady long-term growth.
One of the keys to Sirius XM’s success is the diversity of its revenue. Terrestrial and online radio providers generate the majority of their revenue from advertising. The thing about advertising is that it’s highly cyclical and prone to fluctuations. Sirius XM generated less than 19% of its revenue from advertising in the first quarter (via Pandora).
By comparison, Sirius XM generated nearly 78% of its revenue from subscriptions in the quarter ended March. Subscribers to its satellite radio service are far less likely to churn than companies are to cut advertising spending during periods of economic turmoil. Combine that with the fact that Sirius XM is the only licensed satellite radio operator — and thus has exceptionally strong pricing power — and you have a recipe for stable operating cash flow in just about any economic climate.
Additionally, Sirius XM enjoys better cost transparency than most radio operators. While content and royalty costs will fluctuate from quarter to quarter, transmission and equipment costs won’t change much, if at all, regardless of how many subscribers the company adds.
At no point in Sirius XM’s 30 years as a public company has it been cheaper than it is today. Shares can be purchased by opportunistic investors for as little as 8 times next year’s earnings, a 55% discount to the average next year’s earnings over the past five years.
Should You Invest $1,000 in Nvidia Now?
Before you buy Nvidia stock, here are some things to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $757,001!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of June 24, 2024
John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Amazon and Sirius XM. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, Cisco Systems, and Nvidia. The Motley Fool has a Disclosure Policy.
1 Stock Split Stock You Can Buy With Confidence for the Second Half of 2024, and 2 to Avoid was originally published by The Motley Fool
