While Wall Street is rightly enamored with the long-term potential of artificial intelligence (AI) – PwC analysts believe AI could add $15.7 trillion to the global economy by 2030 – the excitement surrounding stock splits has played a meaningful role in the development of the economy. Wall Street’s major stock indexes will soar to record highs in 2024.
A stock split is an event that allows a publicly traded company to change its stock price and the number of shares outstanding by the same factor. Please note that these adjustments are entirely cosmetic and have no effect on a company’s market capitalization or underlying operating performance.
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Since consumer goods juggernaut Walmart started the party by completing a 3-on-1 split in late February. Well over a dozen high-profile companies have followed in his footsteps, all but one of the forward variety. Forward splits are intended to lower a company’s stock price so that it becomes nominally more affordable for ordinary investors who don’t have access to stock purchases from their broker.
While many of these “Class of 2024” stock splits are market-leading companies, their prospects may differ significantly. As we head into November, one unique stock split stands out as nothing short of a screaming bargain, while two others are worth avoiding.
While most investors are attracted to companies that do forward splits, the one prominent reverse split of 2024 is the unique stock that can be picked up with confidence in November. I’m talking about a satellite radio operator Sirius XM Holdings(NASDAQ: SIRI)which completed a 1-for-10 reverse split following the completion of its merger with Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group, after the close of trading on September 9.
Companies that conduct a reverse stock split often do so to avoid being delisted from a major stock exchange. What makes Sirius XM unique is that there was no danger of it being booted from the computer Nasdaq stock exchange. However, it has fluctuated between $2 and $7 per share for more than a decade. With some institutional investors avoiding stocks priced below $5 per share, this split was intended to put Sirius XM back on the radar of Wall Street’s smartest money managers.
One of the most attractive aspects of putting your money to work in Sirius XM is that it is a legal monopoly. Even though it still battles for listeners with traditional radio operators, it is the only company licensed for satellite radio. This boosts the pricing power of subscriptions in the long term.
Another key differentiator for Sirius XM is the way it generates revenue. Terrestrial and online radio providers generate revenue almost exclusively through advertising. While this works great during extended periods of economic expansion, it can be difficult when companies scale back marketing budgets during a recession. Sirius XM generated just 20% of its net revenue from advertising through the first nine months of 2024.
By comparison, Sirius XM has generated nearly 77% of its $6.5 billion in net revenue from subscriptions this year. Subscriptions provide predictable cash flow, with subscribers far less likely to cancel their service than companies to cut back on ad spend at the first sign of economic turbulence.
Finally, Sirius XM offers a compelling value proposition and a 4% yield that beats the market. Shares can be snapped up for as little as eight times next year’s earnings, a stone’s throw from all-time lows in its 30 years as a publicly traded company.
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But not all stock split stocks are worth buying in November. Early stock investors would be wise to steer clear of the specialist in customizable rack servers and storage solutions Super microcomputer(NASDAQ:SMCI). Super Micro executed its first-ever split, 10-to-1, after the close of trading on September 30.
It’s fair to say that there have been plenty of bright spots for the company over the past year. In fiscal 2024 ended June 30, Super Micro posted a 110% increase in revenue to $14.9 billion, and expects revenue to rise to a range of $26 billion to $30 billion in the current fiscal year.
The fuel behind the rise of Super Micro Computer is its customizable rack servers, which are integrated Nvidia‘s ultra-popular graphics processing units (GPUs). Companies looking to capitalize on the AI revolution have shown a willingness to spend big on the infrastructure needed to make it happen.
But it wasn’t all roses and moonshine for this previously high-flying AI stock. In late August, noted short seller Hindenburg Research released a report alleging that Super Micro had committed “accounting manipulation.” Despite denying these claims, the company has since postponed the filing of its annual report Wall Street Journalfacing an early-stage investigation from the U.S. Department of Justice.
To make matters worse, Ernst & Young resigned last week as Super Micro Computer’s accounting firm. With Ernst & Young having previously raised concerns about Super Micro’s internal controls, this fuels Hindenburg’s allegations. While I’m not here to pass judgment on Super Micro’s accounting practices, the company’s stock should at least be off limits until this matter is resolved and the annual report is filed.
To wrap it all up, Super Micro depends on its suppliers, including Nvidia, to maximize its AI opportunities. With orders for Nvidia’s AI GPUs lagging, there’s a chance that Super Micro Computer won’t reach its full potential.
The second high-flying stock split that savvy investors should avoid in November, and perhaps well beyond, is a provider of AI business analytics software. MicroStrategy(NASDAQ:MSTR). MicroStrategy’s board announced a historic 10-to-1 forward split in July, which was executed after the close of trading on August 7.
Although MicroStrategy’s main source of revenue has been its software division for decades, most of its $50 billion market cap is tied to its Bitcoin(CRYPTO: BTC) possessions. As of September 20, it owned 252,220 Bitcoin, which accounts for 1.2% of all tokens that will ever be mined. However, there are three glaring flaws in MicroStrategy’s practices that simply cannot be ignored.
The main reason why MicroStrategy can be avoided is the unjustifiable valuation premium of its Bitcoin portfolio. As of this writing, late in the evening of October 31, a single Bitcoin was valued at $69,362, bringing the value of MicroStrategy’s crypto assets to $17.56 billion. But Wall Street currently values the company’s Bitcoin at $49 billion (a $1 billion valuation is generously assumed for the company’s software division). There is absolutely nothing that justifies paying a 179% premium over Bitcoin’s current price.
Second, MicroStrategy’s method of acquiring Bitcoin is, in my opinion, incredibly dangerous. It finances these purchases through convertible debt offerings. Although the company expects annual interest expense on its total debt load of more than $4.2 billion to be just $34.6 million, it has burned through $35.7 million of cash from its operations in the first nine months of 2024. There are serious questions about MicroStrategy’s ability to pay off its debt.
To build on this point, MicroStrategy has put in place a plan to (I hope you’ll sit down for this) $42 billion in capital over the next three years to buy Bitcoin. It plans to issue $21 billion worth of shares through continuous market offerings, which would dilute existing shareholders, as well as $21 billion in fixed income securities.
The icing on the cake is that MicroStrategy’s sole source of operating cash flow – its AI business analytics software segment – has seen double-digit revenue declines over the past decade.
MicroStrategy has all the hallmarks of a bubble that will eventually burst.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Bitcoin, Nvidia, and Walmart. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
1 Unique Stock Splits That Are a Screaming Buy in November, and 2 to Avoid was originally published by The Motley Fool
