Stock splits are back in the spotlight next Nvidia recently took this step. Investors should remember that this is just a cosmetic move that does not change the value and fundamentals of a company. What a stock split does is increase the number of shares outstanding while simultaneously lowering the price of each share. The total market value of the company therefore remains the same.
However, there is a belief that a stock split could increase demand for a company’s shares because more investors would be able to purchase them, with each share now available at a lower price.
That’s probably one of the reasons why people like Super microcomputer (NASDAQ: SMCI) And ASML Holding (NASDAQ: ASML) might consider splitting their shares. Let’s take a look at why these two companies, which are playing a crucial role in the artificial intelligence (AI) revolution, seem ripe for a stock split.
1. Super microcomputer
Shares of Super Micro Computer (also known as Supermicro) have tripled in value over the past year and are now worth just over $760 per share. However, it is still 34% lower than the 52-week high it reached in March. Therefore, management may consider splitting the stock to generate investor interest.
Supermicro has never done a stock split. Management probably didn’t feel the need to do so, as the stock was trading for around $80 at the end of 2022. However, surging demand for its AI server solutions has led to an 858% increase in its share price since the start of 2023. That means Supermicro has risen by a multiple of more than 9 in less than 18 months.
That’s why the time seems right for a stock split at Supermicro. However, since a split is nothing more than a cosmetic move, now would be a good time to buy the stock regardless of a split to take advantage of the recent share price decline.
Indeed, demand for Supermicro’s AI servers is so strong that its revenues tripled to $3.85 billion in the third quarter of fiscal 2024 (ending March 31), and adjusted net income quadrupled year over year to $6, 65 per share.
Management has guided for fiscal fourth quarter revenue of $5.3 billion and expects adjusted earnings to come in at $8.02 per share, near the midpoint of the guidance range. The company reported revenue of $2.18 billion in the same quarter last year, along with adjusted earnings of $3.51 per share. If the forecast is met, the top and bottom lines will more than double again in the current quarter.
And Supermicro can sustain its healthy growth over the long term, as the AI ​​server market it supplies is expected to grow 26% annually over the next five years. Sales of AI servers are predicted to increase from just over $12 billion in 2023 to over $50 billion in 2029.
There are also some more ambitious estimates, with contract electronics manufacturer Foxconn expecting sales of AI servers to reach $150 billion by 2027.
Supermicro’s recent results indicate that it is growing faster than the AI ​​server market, a sign that it is gaining ground in this area. Overall, the company’s lucrative AI-related capabilities and rapid growth are solid reasons to buy the stock now. Furthermore, Supermicro trades at just 21 times forward earnings, a discount to the Nasdaq-100‘s forward earnings multiple of 28 (using the index as a proxy for technology stocks).
So, investors have a great opportunity to buy this AI stock, and they should consider taking advantage of it as its healthy outlook won’t be affected by a stock split.
2. ASML Holding
ASML Holding is another company that could consider splitting its shares, with each share now worth just over $1,040. The last time the Dutch supplier of semiconductor manufacturing equipment completed a split was in October 2007, and since then its shares have risen 2,250%.
These impressive profits are the result of the company’s central role in the semiconductor industry, and not because of its split nearly seventeen years ago.
ASML’s extreme ultraviolet (EUV) lithography machines allow foundries to make chips for a variety of applications. And AI is a catalyst that has customers lining up to buy EUV machines to produce advanced chips using process nodes of 7 nanometer (nm), 5 nm, 3 nm or smaller. The smaller the process node, the more powerful and efficient the chip is.
With the need for AI chips growing, ASML is witnessing robust demand for its EUV machines, and the company had an order book worth 38 billion euros ($40.9 billion) at the end of the first quarter of 2024. That is higher than the company’s order book. Annual revenue expectations for 2024 are $29.6 billion, which is in line with 2023 revenues.
Management predicts an acceleration of revenue growth in the second half of 2024 thanks to the recovery in the semiconductor market. In addition, the company will begin supplying its new $380 million machine to semiconductor suppliers this year to help them produce advanced AI chips.
The market for these chips is expected to grow 38% annually through 2032, so ASML should continue to witness healthy demand for its EUV machines. And being the only manufacturer of these machines, it’s no surprise that earnings growth is expected to accelerate significantly next year.
So even if the company doesn’t split its shares to reduce the value of each share, the prospects suggest it’s built for greater profits in the long term. Investors looking for a semiconductor stock with a mission-critical role in the AI ​​revolution may want to consider buying ASML Holding before its growth accelerates.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Nvidia. The Motley Fool has a disclosure policy.
Stock-Split Watch: 2 Artificial Intelligence (AI) Stocks That Appear Ready to Split was originally published by The Motley Fool
